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Macau undergoing change but for the better

Tue, Jun 11, 7:35pm by Staff Writer

Macau is changing and with its unprecedented mass gaming recovery likely unfolding over the rest of this year, the casino capital’s transformation from VIP gaming to mass market is starting to show its muscles.

Forbes is reporting that beyond the numbers and stakeholder buzz at last month’s Global Gaming Expo Asia (G2E Asia) trade show and conference at Venetian Macao, crowds on the streets, casino floors and breakfast buffets announce Chinese tourists remain genuinely excited about visiting Macau despite slowing economic growth, trade tensions and expiring casino concessions.

Macau’s casino revenue rose 1.8 per cent in May from a year earlier to US$3.24 billion, boosted by the May 1 Labor Day triggering a weeklong holiday.

It’s just the second month in 2019 when gaming revenue grew, the other February, was boosted by Chinese New Year.

Mass revenue in May grew in the low teens, VIP revenue declined 11-12 per cent and VIP volume, or roll, fell in the high tens, JPMorgan analysts DS Kim and Christopher Tang estimate.

Revenue in May spiked

For the year through May, gaming revenue has decreased 1.6 per cent.

First quarter earnings report show that Ebitda rose 2 per cent industry-wide, despite a marginal decline in gaming revenue.

Morgan Stanley analyst Praveen Choudhary notes that luck-adjusted Ebitda fell 2 per cent, calculating mass revenue grew 10 per cent, VIP revenue fell 12 per cent and VIP roll retreated 23 per cent from a year earlier.

Any revenue or earnings snapshot, though, is just a tree in the forest of Macau’s transition.

“The story is mass”, gaming and marketing consultancy 2NT8 managing director Alidad Tash says.

The former Las Vegas Sands and Melco Resorts executive suggests the VIP segment in Macau is being marginalised in favour of mass market gaming and more generally mass tourism, in which gambling is just one revenue stream, along with shopping, hotels and food.

“We are encouraged by the fact that mass [gaming] growth is tracking better than expected and we estimate second quarter growth to accelerate by 12 per cent year on year, from 10 per cent year on year,” Choudhary writes in a research note.

“What’s also very encouraging is that mass strength does not appear to be driven by the Hong Kong Zhuhai Macau Bridge, which felt ghostly when we travelled it, given the lack of traffic. We see a significant opportunity for the bridge to ramp up over the coming years, driving continued support.”

Slowing Chinese economy not deterring investment

Mass revenue isn’t defying the gravity of a slowing economy in mainland China, source of two-thirds of Macau’s visitors and experts say, even more of its gaming revenue and tourist spending.

Sanford Bernstein senior analyst Vitaly Umansky says mass growth slid from 16 per cent in last year’s third quarter to 13 per cent in the fourth and 10 per cent in this year’s first, adding, “mass growth has been decelerating in contrast to VIP, which has seen declines in quarter one after decelerating for much of 2018.”

“Rising contribution from mass/non-gaming (making up nearly 85 per cent of industry profits) means Macau’s cash-flow generation capability has never been more visible, predictable or sustainable, in our view,” JPMorgan’s Kim writes in a client note.

“We still see a multi-year structural growth story, which shouldn’t be clouded by short-term volatility.”

Yet worries over China’s economy, US-China trade conflicts and concession expiration are clouding investors’ outlook.

Through the middle of last week, share prices for the six Macau casino operators were each down 20 per cent or more during the past 30 days and fallen by an average of 36 per cent over the past 12 months.

There’s nothing in the numbers or on gaming floors to suggest that level of value destruction.

Macau concessionaries have US$10.5 billion worth of projects in progress and that much again on the drawing board, according to a report by Union Gaming Group analyst Grant Govertsen.

Casino operators appear unfazed by concession expiration in 2022.

For casino operations, concession expiration is like living in California: you accept the unlikely possibility of The Big One, the earthquake that wipes you out, and live your life, or you move.

And operators aren’t moving out of Macau.

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