MACAU

Are slots finally gaining a foothold?

Slot machines have long been a secondary attraction to table games in Macau’s casinos, but a combination of product innovation and evolving customer preferences suggest they are a growing influence on operator revenue.

The latest financial results from Macau’s operators showed a healthy increase in slot machine revenue, indicating that a mix of product innovation, evolving customer preferences and new capacity are beginning to help them gain traction.

According to figures from Macau’s Gaming Inspection and Coordination Bureau (DICJ), GGR from slot machines in the enclave was MOP 3.82 billion (US$ 474 million) for the first three months of 2018, up 17.9 percent on the same period in 2017.

To be sure, slots are still a small part of the market accounting for less than five percent of Macau’s total gaming revenues compared with more than half of revenues in Las Vegas. Q1 figures also showed VIP baccarat still leading the way up 21 percent, but slots are becoming a more important part of the mix for operators with the addition of new properties on Cotai.

“Over the last many years growth in the number of slot machines has been notably lower than of tables games,” Grant Govertsen, managing director at Union Gaming Securities Asia, told AGB.

“This is clearly a function of customer preference in that mainland Chinese customers have significantly less interest in slot machines than they do in table games - especially baccarat.”

There are signs this is starting to change. The number of slot machines in Macau grew an impressive 10.1 percent to 17,205 during the first three months of 2018 versus the previous quarter.

Melco’s Studio City reported an 18.5 percent year-on-year increase in average win per unit per day on gaming machines during Q1 2018, while also increasing the number of machines by 4 percent.

At Galaxy Entertainment, electronic gaming revenue was up 14 percent year-on-year, just behind the 16 percent growth in mass. Quarteron-quarter, it was up 9 percent, beating both VIP and mass on that basis. The slot handle at the Venetian was up 28.2 percent in Q1, just beating VIP volume and slightly lagging mass table drop, which grew 29.9 percent.

Meanwhile, MGM China Holdings said in its 2017 annual report that revenue from slot machine gaming operations increased year-on-year by 11.4 percent to HK$ 1,397.1 million. This outstripped growth in its main floor tables and VIP revenue during the year.

“Whilst Macau is a table-dominated market and likely always will be, we believe that slots will continue to play an important role in the future of Macau casinos,” Michael Cheers, sales director Asia at IGT, told AGB.

Casino floors throughout Macau are currently saturated with the same few game titles, and our customers are looking to diversify their floors with new, engaging games that will keep players interested,

Cheers said that the key to growing Macau’s slots vertical is offering a more diverse product offering. The supplier recently launched its Hyper Hits link slot machine at MGM Cotai for the first time, saying it was “encouraged” by the positive feedback it had received.

“Casino floors throughout Macau are currently saturated with the same few game titles, and our customers are looking to diversify their floors with new, engaging games that will keep players interested,” he said.

The question both operators and manufacturers face is identifying the characteristics of slots players and tailoring their offerings accordingly.

Kevin Lee, deputy general manager of Aruze Gaming Macau, the third biggest supplier of electronic gaming machines in Macau, said slot players tend to be very distinct to those who favour table games.

He said the slots segment is younger, more likely to favour privacy, and more international in its composition compared to the predominantly Chinese customer base for Macau’s table games.

This profile is evolving, however, particularly as Macau attempts to better position itself for the mass market.

Technical advances in the manufacture and delivery of slots have played a significant role in creating products that are more appealing to the Macau market.

Suppliers now appreciate that reskinning slots that have succeeded in Vegas with an Asian theme is not enough. Instead, products are designed from the ground up with Macau in mind, taking into account theming, maths modelling and volatility.

However, product innovation is not a seamless process. Lee at Aruze noted that “stringent controls and requirements” from the enclave’s regulator have created barriers for manufacturers.

Currently, all electronic gaming machines must comply with Macau’s technical standards and be certified by a recognised gaming testing laboratory, with only licensed manufacturers permitted to supply gaming machines.

While this is in line with other jurisdictions, it can limit the speed at which new products are brought to market.

From a regulatory perspective, slots suppliers will be more encouraged by the fact that Macau is already close to its table cap - just 657 tables short, according to research from Union Gaming.

The number of slot machines permitted remains uncapped, and although the Macau government has occasionally hinted at changing this status quo, operators could well turn to the vertical to power growth if table game expansion is limited.

Galaxy Entertainment Group

Galaxy Entertainment Group (27.HK) has three main properties and runs three City Club casinos inside hotels. The company’s Galaxy Macau Phase 2 and Broadway at Galaxy Macau opened on May 27, 2015, almost doubling the capacity of the resort. The property is viewed by analysts as one of the best placed in Macau, having made considerable efforts in recent years to boost its mass market appeal.

Earlier this year, Galaxy bought a stake of just under 5 percent in Wynn Macau, which it says is for investment purposes. For Q1, Galaxy posted record Q1 adjusted EBITDA, despite bad luck during the period, and said it’s actively pursuing its expansion plans in the Philippines and Japan. Group revenue rose 32 percent to HK$18.5 billion ($2.35 billion). Adjusted EBITDA was HK$4.3 billion, up 36 percent. Normalized for the luck factor, adjusted EBITDA was up 41 percent. Gross gaming revenue gained 31 percent to $17.2 billion, mainly driven by the VIP sector, which posted a 44 percent gain. The company was granted a license for a resort on Boracay, though the fate of the project is unclear after Philippine President Rodrigo Duterte has repeatedly said he will not allow a casino on the island.

SJM Holdings

SJM Holdings (880:HK) has 22 casinos in Macau, though the former monopoly has been losing market share to new IRs on Cotai. In Q1, its share of the market declined to 14.7 percent from 16.9 percent. The company is counting on its new IR, the Grand Lisboa Palace, which is under construction on Cotai to help it recover lost ground. However, that resort is not expected to open until late 2019, which is likely to result in further market share losses. Analysts are also concerned about the high build cost for the IR. “Based on [Grand Lisboa Palace’s] current capex budget, its construction cost per room is one the highest among the new properties in the Cotai area, reaching to Wynn Palace level. But it would be difficult for the room quality to reach that of the Wynn Palace,” Bernstein Research wrote in a recent note.

For Q1, its overall results for the period beat expectations, with net gaming revenue ring 6.7 percent to HK8.4 billion ($1 billion) and adjusted EBITDA up 17 percent to $987 million.

In June, SJM Chairman and Macau gaming legend Stanley Ho formally stepped down from the company.

Melco Resorts & Entertainment

Melco Resorts & Entertainment (6883. HK) has three casinos and the Mocha Clubs. The company operates the City of Dreams and Studio City in Macau and the City of Dreams Manila.

The operator is developing an IR on Cyprus in the Mediterranean and is one of the most active in pitching for a license in Japan. In June, Melco opened its 772-room Morpheus hotel tower. The hotel, which was designed by the late Zaha Hadid, will double the number of rooms available for premium mass customers, while increasing room capacity at City of Dreams by 50 percent. The $1.1 billion hotel opened with 40 gaming tables transferred from other Melco properties.

In Q2, Melco reported an 8 percent gain in adjusted property EBITDA driven by its City of Dreams Manila and Altira properties, though its results were hit by bad luck and a change in accounting practices for revenue. Overall net revenue was $1.23 billion, down 5 percent. Without the new reporting standard, revenue would have gained 3 percent.

Adjusted property EBITDA was US$355.5 million compared to US$329.5 million in the second quarter of 2017, while net income rose to $57.3 million from $36.5 million a year earlier.

The company said it expected the new Morpheus to help mark a new beginning for City of Dreams Macau and it was already beginning to see higher volumes in July. The company also said it plans to get to work on plans for the Phase 2 expansion of Studio City in the second half.

Wynn Macau

Wynn Macau (1128:HK) operates two resorts, with its $4 billion Wynn Palace opening in 2016. The company’s original property is on the Macau Peninsula. The Wynn Palace has 1,700 hotel rooms and 90 percent of the resort will be non-gaming. The resort has two further plots of land available for development and the company is considering adding more non-gaming attractions. It may consider virtual reality or alternative reality concepts to drive visitation, although there are no current plans. Operating revenues from Wynn Macau were $618.2 million for Q1 an 11.9 percent increase for the same period of 2017.

Adjusted property EBITDA from Wynn Macau was $209.8 million, up 15.9 percent. Table games turnover in VIP operations was $17.09 billion, a 28.6 percent increase. Wynn Palace outperformed in the quarter, with revenues showing a 47.2 percent gain to $665.8. Adjusted Property EBITDA was $211.9 million, an 89.4 percent gain. VIP table games turnover in VIP operations was $15.39 billion, a 39.3 percent increase.

MGM China

MGM China (2282:HK) is operating two casinos, with its MGM Cotai IR opening in February. The IR, with its jewellry box design, is already contributing to group results. The HK$27 billion IR features 1,400 hotel rooms and suites, meeting space, high end spa, retail offerings and food and beverage outlets as well as the first international Mansion at MGM for the ultimate luxury experience. MGM Cotai will also host Asia’s first dynamic theater with resident shows and more than 300 pieces of contemporary art. In Q1, MGM reported a 26.4 percent year-on-year increase in revenue to HK$4.7 billion (US$598.7 million). Total adjusted EBITDA stayed relatively flat in the quarter, at HK$1.3 billion, compared to HK$1.2 billion in the prior year period. Revenue from MGM Cotai reached $665 million in the quarter. MGM Macau revenue rose to HK$4 billion, up from HK$3.7 billion a year before. The company is also pushing hard for a casino license in Tokyo and is angling for the key Osaka market.

Sands China

Sands China (1928:HK) has five properties in Macau. The $3 billion The Parisian opened in September 2016 and is now a key driver of group results. It features a scale replica of the Eiffel Tower, nearly 13,000 hotel rooms, two million square feet of retail-mall offerings and two million square feet of MICE capacity. The company is planning to redevelop its Cotai Central property into a London-themed resort, starting from the end of this year. The company is spending $1.1 billion on the project, which will feature some of the U.K. capital’s most recognizable landmarks as well as more retail space. The works are scheduled for completion by 2020. Sands has the largest room count of any of the Macau operators and is also seen as the most mass-market focused. In Q1,net revenues for Sands China increased 17 percent to $2.16 billion, while net income increased 59 percent to $557.

Mass leads Q2 revenue growth

The mass market overtook the VIP sector to lead growth in Macau’s gross gambling revenue in Q2 with a gain of 21 percent over the prior year, according to figures from the Gaming Inspection and Coordination Bureau.

VIP gaming rose 14 percent in the same period, the slowest rate in more than 18 months. “That mass, once again, drove growth in 2Q is great news for operators as it has been the backbone of the recovery and is generally less sensitive to political winds,” Union Gaming wrote in a note.

“That mass outpaced VIP is also an upside surprise relative to most expectations and, trade war fears notwithstanding, is reason to remain bullish on the Macau names.”

US/China trade war may catch operators in crosshairs

A trade war between the US and China could have implications for Macau casino companies, which, according to Steve Vickers and Associates (SVA), sit on the “geopolitical fault line.” “US patience towards China’s mercantilism – exemplified by the provision of cheap credit and subsidies to exporters, the systematic appropriation of intellectual property, and a failure to open its economy – has run short,” said SVA.

“Further escalation seems inevitable, as tensions intensify,” said the firm in a report.

The Hong Kong-based risk advisory firm said any slowdown in the yuan’s value may lead to Beijing imposing further restrictions on capital outflows, while US-based casino companies, with their ties to Trump, may see their Macau concessions at risk as a result.