MACAU

Operators eye China projects as governments push integration

As Macau and China step up cooperation in the Greater Bay Area, the territory’s operators are paying heed and turning their attention to opportunities on the Chinese Mainland.

The island of Hengqin, which has long been touted as key for transforming Macau into a mass-market tourism destination by providing the space for development is in particular focus.

Hengqin is connected to the Cotai Strip via the Lotus Bridge and is roughly three times the size of Macau, with a population of about 53,000. There has been talk for decades of greater integration between the two to help drive development of non-gaming amenities.

However, progress has been slow, partially due to reluctance among Macau citizens to be engulfed by the Mainland. Covid may have helped to soften attitudes.

“I feel that the COVID pandemic has reinforced Macau businesses’ realization that Macau is heavily reliant on the Chinese market for visitors and other supplies, including human resources, although some Macau residents are still resistant to this fact,” says Desmond Lam, professor in integrated resort and tourism management at the University of Macau.

“There is already a certain level of social and business integration between Macau and its neighboring Chinese cities. Economic diversity is not just a priority for the Macau government, it is a necessity to ensure continued prosperity for Macau; and so is integration (at all levels) within GBA.”

According to Matthew Ossolinski, CEO of GW Investment Consulting, some of Macau’s big six operators are taking another look at opportunities on the island, partly with a view to the upcoming concession renewal process.

Land on the island would allow them to expand non-gaming offerings, which some analysts have speculated may be stipulated as a condition in the license tenders.

Sands China has already set up back office operations and others are in the process of doing so, while they are also actively seeking out tourism development projects to brand and invest in. Galaxy Entertainment already has a 2.7 sq. km parcel of land on the island, on which it says it plans to develop a “world class, lifestyle leisure resort.”

In its 2020 annual report, the operator said it had been encouraged by greater ties between the two locations and was continuing its planning for the project.

“Hengqin is effectively Macau’s expansion zone,” said Ossolinski, whose firm provides advisory and business brokering services to integrated resort operators and institutional investors on Hengqin Island. “The vision has been explicit and unwavering for 20 years: to develop Macau into a ‘world centre for tourism and leisure’. Hengqin provides the space and accommodative policy needed to achieve that.”

While Macau, Hengqin and the Greater Bay Area initiative are often spoken about as one project, the Macau-Hengqin tourism zone will be its own unique and distinctive market within the Greater Bay, he argues.

It’s “an aspiring world class tourism cluster–by revenues the world’s largest–and home to China’s Nasdaq with a Macau label on it,” he says. “It’s like a Las Vegas merging with an Orlando–except with a casino monopoly on 1.4 billion enthusiastic gamblers.”

Macau’s tourism industry was brought to its knees by the pandemic and its economy was one of the worst-performing in the world as a result. Eighteen months into the crisis, visitation is nowhere near back to normal and gross gambling revenue for June is forecast to be down some 70 percent from its 2019 levels for the month.

It’s been a different story on Hengqin, which is not subject to border restrictions and has benefited from China’s domestic travel boom.

Elsewhere in the Greater Bay Area, Melco Resorts & Entertainment’s parent Melco International, has announced plans for a RMB4 billion ($616 million) entertainment complex in Zhongshan, China, in a move seen as likely to benefit its chances of concession renewal.

The company has teamed with Chinese property developer, Agile Group, on a premium residential, entertainment and hospitality mixed-use complex. The city is a key hub in the Greater Bay Area and has good connections with Macau, Zhuhai, Guangzhou, Shenzhen and Hong Kong.

Ben Lee, managing partner of iGamiX Management & Consulting said it’s a “very clever” move on Melco’s part.

“They bypass the usual Macau conundrum of lack of land, labour and government efficiency and have gone straight to the heart. Developing non-gaming diversification in an environment and market which will support that kind of investment,” he said. “They obviously believe that you don’t have to necessarily invest in Macau to win the attention of the true decision makers.”

MGM China has also been stepping up activity on the Mainland through its joint venture with China’s Diaoyutai State Guesthouse. The companies have recently announced plans to develop several hotels in Guangdong, including in the cities of Shenzhen and Zhuhai.

Macau 2025 GGR seen 25% higher than 2019

Macau’s recovery has been slowerthan-expected this year, though analysts at Bernstein still predict a bright future, forecasting the market will be 25 percent higher than it was in 2019 by 2025.

They argue that the long-term structural story for the market, driven by mass and premium mass gaming remains intact. In a note on Sands China and Las Vegas Sands, the analysts said they expect GGR in 2022 to reach 89 percent of prepandemic levels and then to see growth of more than 11 percent through to 2025. They said they expect the mass market to be 50 percent higher than it was in 2019. Beyond that date, the analysts said further growth will depend on project development in Macau.

Bernstein has an “outperform” rating at both Sands China and its parent company Las Vegas Sands. The firm expects Sands to retain its leading market share of Macau’s mass market and non-gaming revenue. The operator has five properties in Macau and the largest room count, giving it an advantage in the mass market sector.

It also has a highly differentiated product offering, with its retail business contributing 12 percent of profit. The company’s mass tables and slots business make up 65 percent of profit, hotels 14 percent and lower-margin VIP just 7 percent. Bernstein notes that Sands has the highest exposure to the mass market of all the operators at 74 percent of GGR compared with the market average of 61 percent.

“We forecast Sands to further expand mass GGR contribution to 85 percent of its GGR by 2025 and maintain its market leadership position among all six operators,” it said.

HK/Macau travel bubble positive, but don’t expect a gold rush

The travel bubble that is being discussed between Hong Kong and Macau would be a positive step in opening up the market, but wouldn’t necessarily lead to a surge in gross gambling revenue for the territory, Glenn McCartney, associate professor of gaming and hospitality management at the University of Macau.

McCartney, who has been closely following the recovery of the Macau market explains that any opening will be based on data and science and as a result is likely to be slow and cautious.

“You limit the border opening with HK to the few so you can test the system,” he told AGB in a recent interview. “Unless you’re bringing in the high end, the impact won’t be that big for the gaming industry, it will be a positive, but initially not such an impact.”

Analysts see reopening with Hong Kong as a major positive for Macau, having accounted for about 20 percent of its revenue prior to the pandemic. However, the former city has had more of a struggle in containing the Covid crisis and officials are treading carefully when it comes to opening the doors.

Firstly Macau officials said there needed to be 28 days with no local transmission in Hong Kong. A requirement that has now been met. Then Hong Kong CEO Carrie Lam said she wanted the reopening to coincide with an opening of the Mainland China border, which Beijing says won’t happen until the special administrative region meets certain targets, such as 70 percent vaccination - a level analysts say won’t be met until mid-October.

The Macau government has invited health experts from the Mainland to advise it on how to safely reopen.

In Macau, vaccination rates have been improving after initial vaccine hesitancy.

McCartney says that life in Macau has been fairly normal for most of the last year, with the only inconveniences being the wearing of face masks, which has meant there is no sense of urgency amongst locals to get vaccinated.

In a recent study, carried out with a colleague, McCartney found that the inconvenience of getting a vaccine was not a factor in the decision and that the government messaging perhaps needs to change.

“There’s a big communication campaign, there’s a lot of messaging, but maybe that messaging should change somewhat,” he said. “It’s a marketing thing, we need to look at what works along the vaccine adoption curve and people at the very end of the product adoption curve will need a bit more messaging to get them to take the vaccine.”

“There’s a company in Macau that has people in Macau doing testimonials. It becomes more personal as to why you need a vaccine. The government could perhaps tweak that messaging a little bit to get more people vaccinated.”

Despite the evident frustration in the industry and amongst stock analysts that the recovery process is dragging, McCartney urges a more optimistic view. Since a travel corridor with Mainland China was opened in the third week of September, Macau has seen nearly 4 million arrivals, which is a tourism level few, if any, other destination could match last year.

“I think it’s something Macau should be upbeat about. We’ve been very successful in setting up a very safe travel corridor and we’re seeing that recovery in the casino space too.”

“I support a cautious approach because if you get any cases because you are going too fast then you’ll have a major setback and no one wants a major setback. We could be backtracked many months from what we’ve achieved right now.”

He acknowledged that there has been some slippage due to new outbreaks in Guangdong in June, which saw Macau record its worst month for gross gambling revenue so far this year. But restrictions have eased again as the medical situation has come back under control and analysts are predicting a strong summer.

Still, at the end of the day McCartney stresses that in order to have the return of large-scale events, Macau needs to reach herd immunity with its vaccine programme. Increasingly governments are mandating a vaccine certificate as compulsory for travel and large gatherings and ultimately this may help to tip the balance.

“The Foo Fighters concert in Madison Square Garden gathered 20,000 people who all had to show their vaccination certificate. People who do not may be annoyed as they’re a fan and not vaccinated. However, if you want to travel you’re going to have to get vaccinated.”

Grand Lisboa Palace takes its place on Cotai after muted debut

SJM Holding’s long-awaited Grand Lisboa Palace made a low-key debut in late July, filling out the offering on the Cotai Strip as the last major IR planned for Macau.

The HK$39 billion ($5 billion) property was scheduled to open in 2017 after beginning construction in 2014. However, it faced numerous delays, including fires and government-mandated halts on construction due to work accidents.

As it was, the property opened on July 30th, with just a few days prior notice from executives and little fanfare.

On a visit to the property on opening day, AGB noted that there was good interest from the public despite the short notice, with visitors picking up throughout the day.

Checks of the casino revealed that about half of the 150 mass gaming tables on the casino floor were staffed, with a steady increase of punters in the hours following the opening.

However, given the low profile of the property’s debut, the scene was a far cry from the throngs of visitors witnessed at the opening of the seven other integrated resorts on the Cotai Strip.

The property made its debut with 150 new-to-market gaming tables, all exclusively placed on the mass gaming floor. Speaking at the opening, SJM Chair Daisy Ho said that SJM “will be relocating 118 of our own tables from other properties” on the peninsula to its new casino. These will be drawn both from the mass and VIP sections.

“It will be a ramp up, and so we will be applying to the government very soon,” she said, noting the group hopes to have the tables on site “shortly, within a month or so.” “As to the allocation of mass and VIP, we are working on it,” she stated.

It will be a ramp up, and so we will be applying to the government very soon.

At least two floors within the Karl Lagerfeld hotel tower have been dedicated to VIP Gaming, while one floor within the Grand Lisboa Palace Hotel tower is also reserved for VIP Gaming.

The Palazzo Versace tower was not yet accessible to the public. Both the Karl Lagerfeld and Palazzo Versace hotels are planned to be open – with 270 rooms and suites each, and the “entire Grand Lisboa Palace” is scheduled “to be open by the end of this year,” notes Ho, saying SJM is “looking at a very healthy ramping up”.

SJM held the casino monopoly in Macau for decades, but has been gradually losing market share as newer properties opened and the gaming focus shifted to the Cotai Strip.

It has lagged all the other operators in establishing itself there and the opening of the Grand Lisboa Palace is seen as key in helping SJM to regain ground.

The group’s 2020 annual report indicated that SJM had an 8 percent share of VIP gaming revenue and a 14.1 percent share of Macau’s gross gaming revenue.

New property openings in Macau have historically been key revenue drivers for the market, although given the ongoing pandemic and rapidly evolving situation pertaining to travel restrictions with the Mainland, the opening impact may be subdued.