MACAU

Macau’s VIPs spread their wings

Macau’s reputation as the go-to destination for casino VIPs is under threat as facilities improve in other regional destinations that offer lower tax rates and better junket margins.

According to Union Gaming, Macau leaked $1.4 billion of VIP gross gaming revenue (GGR) last year to its four geographically closest rival markets – Cambodia, Korea, Philippines and Vietnam – with Cambodia and Vietnam accounting for $1 billion of that amount.

This year, the total lost by Macau to the quartet is predicted to rise to $2.6 billion and the competing territories could generate VIP GGR totalling $6 billion within the next two years.

The four neighbours enjoyed a 57 percent rise in VIP GGR in 2018 in comparison with a modest 10 percent rise in Macau, where the total is expected to slump by 15 percent this year before recovering slightly in 2020.

It is a striking development for operators. However, with an effective tax rate of 39 percent on VIP GGR, it is easy to see why Macau is haemorrhaging the high rollers to rival casino jurisdictions.

Of the region’s main markets, South Korea (20 percent) offers the next highest effective tax rate, followed by the Philippines (15 percent), while Japan’s rate will be 30 percent when the first integrated resort opens in the second half of the 2020s.

Vietnam’s rate is approximately 14 percent when commissions are deducted from the statutory rate of 35 percent, followed by Singapore, which will shift from 12 percent to 15 percent in March 2022. The rate in Cambodia and Vladivostok in eastern Russia is currently 0 percent, although the latter demands a monthly $2,000 fee per table.

Without tax reform in the region’s established number-one casino market, Union Gaming predicts that the flow of VIP GGR out of Macau and into rival markets could extend from its current ‘trial’ status up to as long as a decade, or more.

“I think a lot will depend on whether or not Macau responds with a regulatory change – for example, a lower tax rate – that will cause much of this trialling to be repatriated,” Union Gaming Managing Director Grant Govertsen says.

“If not, then we think that given the massive regional pipeline, the trialling period could become something more permanent.”

The tax issue is just one part of the cocktail that is leading to such a significant shift.

Convincing VIPs to try out casinos in new jurisdictions is not new. For example, it is nearly five years since Naga announced grand plans to build a $15 million VIP terminal at Phnom Penh International Airport and launch its own fleet of aeroplanes to carry customers to and from luxury casino destinations.

However, whereas previously VIPs may have explored new destinations before being tempted back to the higher-quality establishments in Macau, the improving standards of facilities elsewhere in the region is adding a fresh dimension.

Another dynamic is the role of the junkets themselves, who are transitioning from an agency type role to that of a casino principal, primarily with the aim of maximising their margins.

With potential returns for junkets in Macau having diminished, new locations are becoming more attractive, with Cambodia and Vietnam again proving to be the primary beneficiaries.

“There are numerous factors, of which the tax rate is one of the most important,” Govertsen says. “This is especially true given the weaker macro environment, which is causing VIP junkets to seek better economics elsewhere.

“The fact that infrastructure improvements have made it easier to reach these other markets matters too. As does the fact that regional casinos are of much higher quality than ever before. When you combine all of these factors, you get the current dynamic of VIPs migrating overseas.”

It is worth remembering that VIP GGR currently accounts for less than 15 percent of GGR for most casinos in the region, with the mass market remaining by far the most important source of income.

However, the scale of future casino developments in the region is moving the goalposts.

To justify the planned $44 billion worth of new casino developments outside Macau in the region over the next five years, World Bank figures suggest that the cumulative GDP in Cambodia, China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam needs to double by 2025.

This clearly unrealistic prospect means that the proliferation of new facilities will dilute mass-market GGR, increasing the importance of VIP-related revenue in the process.

In an increasingly crowded landscape, and in the absence of any likely legislative changes in Macau for the coming years at least, the junkets are likely to hold the key to the impending survival of the fittest for casinos across the region.

Sands China

Sands China (1928:HK) has five properties in Macau. It is currently upgrading its Sands Cotai Central property to a London-themed resort. The company has 12,000 hotel rooms and suites, making up for 48 percent of hotel rooms run by casino operators in Macau.

Sands is promoting the Londoner resort with footballer David Beckham as brand ambassador. Construction work on the project has already begun. Analysts continue to see Sands as the best placed when it comes to non-gaming offerings and appealing to the mass market. It has the largest room inventory in Macau.

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. The opening of its $4.6 billion Lisboa Palace resort was scheduled for later this year, though analysts expect it to be delayed until next.

The company recently signed a binding accord with China Duty Free Group to open a flagship outlet at the resort.

CDFG’s off-airport outlet will cover approximately 7,500 square metres on the first floor of the retail mall at Grand Lisboa Palace, and will offer a diverse mix of perfumes, cosmetics, watches and jewellery, apparel, shoes and accessories, grocery and travel items.

Grand Lisboa Palace will offer approximately 1,900 guest rooms and suites in the Grand Lisboa Palace Hotel, Palazzo Versace Macau and Karl Lagerfeld Hotel. Other features will include a Wedding Pavilion for celebrations and events, a multi-purpose hall and entertainment and leisure facilities.

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 company recently bought an almost 20 percent stake in former joint venture partner Crown Resorts and says it would be interested in further increasing its position in the Australian operator.

“The acquisition of Crown Resorts will enhance MLCO’s business position, in our view,” ratings agency Standard & Poor’s says. “Crown Resorts owns high-quality casino assets that generate strong operating cash flows in a favorable regulatory environment. The immediate financial benefits of MLCO’s shareholding in Crown Resorts will be a stream of stable dividend income,” it added. Melco is pushing hard for a license in Japan and says it will move its headquarters there should it prove successful.

MGM China

MGM China (2282:HK) is operating two casinos, with its MGM Cotai IR opening in February last year. 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.

The ramp up of MGM China’s property on Cotai has expanded the operator’s footprint in Macau significantly, though ramp up has been “very slow,” according to analysts at Bernstein Research.

“We rate MGM China Market-Perform as it is unclear to us what the company’s strategy is to gain a foothold in the Cotai market, which has proven to be very competitive,” Bernstein said in a note. “While MGM Cotai will continue to ramp-up and see meaningful increases in profits (albeit at the risk of incurring cannibalization at MGM Macau), meaningful upside (aside from overall Macau stocks rebound) is more limited at this stage.”

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 company has the largest contiguous land bank in Cotai and intends to expand its non-gaming footprint with Phases 3 & 4 of the resort.

Earlier this year, the company signed a cultural exchange accord with Monaco’s Societe des Bains de Mer, with whom it is also teaming for an IR license bid in Japan.

As part of the program, the company has brought the GRACE KELLY: From Hollywood to Monaco exhibition to Macau.

The exhibition, located at the Crystal Lobby of Galaxy Macau, will be opened to the public for free between May 16 and August 28. Featuring the collections and archives of the Prince’s Palace of Monaco and an array of art pieces, the exhibition traces the story of legendary movie star Grace Kelly, from her Hollywood days as an Oscar-winning actress, to becoming Princess of Monaco.

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.

A Macau appeals court recently upheld a ruling that sees Wynn Macau acquitted of a MOP8.2 billion (US$1 billion) compensation claim made by Japanese gaming mogul Kazuo Okada.

Okada was removed from the Wynn’s board of directors in 2012 after the firm claimed he was “unsuitable” and a risk to its licenses. He had filed a lawsuit against Wynn Macau and its founder, Steve Wynn who had voted to cancel his 20 percent stake in the group.

In his lawsuit, Okada claimed that in 2005 to 2008, Wynn Macau had “tortuously” paid an amount of US$35 million to obtain a concession for a land plot in Macau.

Beijing-backed Ho declares CEO candidacy

Ho Iat Seng, the main contender in the elections to pick Macau’s chief executive, has formally declared his candidacy, holding a press conference in which he commented on the importance of the healthy development of the gaming industry.

Ho is head of the Legislative Assembly and Beijing’s favored candidate for the CEO position, which has a five-year term. There are currently no other declared contenders for the post.

“Although the gaming industry is the most important support for the Macau economy, it also pressures small-medium enterprises on human and land resources, […] the only direction is a healthy development of the gaming industry,” Macau Business cited Ho as saying.

Emperor eyes premium mass for growth

Emperor Entertainment Hotel, the gaming arm of Emperor Group, said it will be looking to expand its share of the premium mass market segment, after posting a fall in revenue and profit for the year ended March 31, 2019.

Emperor, which operates the Grand Emperor Hotel in Macau, saw revenue fall 7.8 percent to HK$1.4 billion (US$179 million), while profit fell 6.6 percent to HK$367.5 million in the year.

“Though there is positive growth in Macau tourism, the development of Cotai casino resorts has started to mature and this, coupled with the volatile global economic environment and intensifying control of capital flows in mainland China, has resulted in slower growth of Macau’s gaming market,” it said.