OPERATOR

Operator focus

Macau’s six gaming operators have far exceeded the capital commitments made to the government at the time their licenses were issued, though with just two years to go before their permits expire, the companies are still in the dark about the renewal process.

The government carried out an interim review of the industry, which it released in 2016, finding that the six casino operators had invested MOP262 billion ($32.75 billion) in 13 years through to 2014.

However, it also made clear that the industry was still over reliant on VIPs and that Macau needed to diversify its economy to include more non-gaming elements. It stressed that it was not interested in further scale and that operators should instead focus on quality and on creating clusters that would facilitate the development of leisure attractions.

The report urged operators to make a “concerted effort” to improve upward mobility of locals into management level positions through better staff training programs and to support the growth of smallto-medium sized enterprises (SMEs).

The review gave no indication as to how the license expiry would be handled.

At the 20th anniversary of the founding of the Macau Special Administrative Region, we take the opportunity to look at some of the objectives the government had been hoping to achieve with the liberalisation of the gaming industry and to what extent these have been met.

We profile each of the six operators, taking a look at their projects, the shift in their market share and gaming to non-gaming revenue over the past five years, as well as their efforts to contribute to the local society through 15SMEs, local charities and the environment.

At the government’s nudging operators have made progress in expanding non-gaming revenue, adding more restaurants, nightclubs and shows. Though they have often struggled to make their expensive non-gaming attractions pay in a notoriously gaming-centric market.

Non-gaming is hovering at just over 9 percent of total revenue, up from 6.6 percent in 2014, but a far cry from the more than 60 percent level enjoyed in Las Vegas and few expect Macau to generate such a split.

Total gross gambling revenue was $37.5 billion in 2018, a gain of 14 percent from the prior year. The industry is expected to see another downturn in 2019 as the slowing Mainland economy takes its toll on the VIP sector, which has been declining in importance over the past decade.

“In 2011, VIP was approximately 70 percent of gross revenues (including non-gaming). In 2018, that figure was around 41 percent and by 2022, we forecast VIP GGR to be approximately 34 percent of gross revenues in Macau,” Bernstein forecast recently.

While this has been in line with government objectives, it has also proved sound business sense for the operators, as the mass market enjoys superior margins and is seen as less volatile.

Last year, the territory attracted 35.8 million visitors, with that number rising 17 percent in the nine months through to end-Sept. 2019, helped by improved access, in particular across the Macau, Zhuhai, Hong Kong bridge.

Despite rising competition around the region, analysts are still optimistic about Macau’s long-term prospects as improved connectivity allows it to reach more cities in China, with the market remaining underpenetrated.

Most agree that it’s highly unlikely any of the six current operators will be denied a further license, though clarity would be welcome by all.

SJM HOLDINGS

Lisboa Palace delays dent market share

Prior to the liberalisation of gaming in Macau, Sociedade de Jogos de Macau (SJM), dominated the market for four decades under the guidance of legendary casino mogul Stanley Ho.

The group operates 20 casinos, including its flagship Grand Lisboa on Peninsula Macau. Sixteen of the properties are known as satellite casinos and are operated under third-party contracts.

All but two of these casinos are situated on the Peninsula.

SJM’s overall share of the Macau gambling market has been declining as newer resorts have opened, dropping to about 13.8 percent in Q3 from 15.3 percent a year earlier.

Analysts say it has suffered as it still doesn’t have a presence on the Cotai Strip, which has become the focal point for gaming in Macau.

Its HK$39 billion ($4.98 billion) Grand Lisboa Palace was scheduled to open in 2017, but has been hit by multiple delays and cost overruns and is now not likely to make its debut before the second half of next year. Construction on the giant resort is near complete, but it will then be required to go through government pre-opening checks.

The east meets west-themed IR is situated on 70,468 square metres of land next to the Macau East Asian Games Dome. About 90 percent of the floor space will be dedicated to non-gaming facilities with about 1,900 hotel rooms spread over three hotels, all targeting premium clientele.

It’s a marked difference from most of the other operators in Macau, which have pushed to expand their mass market business at their newer properties and in particular the coveted premium mass sector.

Chairman and CEO Ambrose So said he expects the “destination resort will become a hub of luxurious accommodation.”

Aside from an in-house branded hotel, the group has signed up Italian haute couture house Versace to design one of the hotels, to be known as the Palazzo Versace Macau with up to 270 rooms, while the late Karl Lagerfeld designed the third, which was a first for the fashion icon.

“I am very happy and proud to work on such a great project: An entire hotel designed by me. It’s the first time for me! I think the idea is great!” Lagerfeld, who died in February this year, said when announcing the project in 2014.

The Lisboa Palace will provide up to 700 gaming tables and over 1,200 slot machines across a gaming floor area of approximately 27,000 square metres.

Until the Lisboa Palace opens its doors, analysts see few catalysts for further growth. Overall gross gambling revenue in Q3 was HK$9.5 billion, down 13 percent from the prior year, with VIP GGR down 43 percent and mass GGR up 12 percent.

Its EBITDA of $950 million missed the consensus forecasts of analysts by about 3 percent.

Still, analysts noted that the group’s margin improved due to a better mix between VIP and mass market revenue.

“While there has been some operational improvement, the lack of any strategy to capture the high margin Premium Mass market and the continued delay in opening Cotai are fundamental problems with management direction and focus, which limit any material upside to SJM stock price,” Bernstein Research noted in its Q3 results analysis.

The group’s concession to operate in Macau was scheduled to expire in March 2020, although it was recently extended to June 2022, to bring it into line with the end of the other concessions, to facilitate the renewal, or rebidding, process.

In its 2016 interim review of the gaming industry, which was designed as a scorecard for the operators’ contribution to Macau, the government noted that all concessionnaires had fulfilled their promises in terms of capital invested.

The government also assessed whether the operators were employing locals and to what extent Macau citizens had enjoyed upward mobility into management-level jobs. It also studied the efforts of the casino companies to support small-to-medium-sized businesses in Macau.

According to SJM, about 90 percent of its 20,400-strong workforce is local.

The interim report found that SJM had a superior level of locals in management-level jobs, or above, with the industry average in 2014 at 82 percent. However, the average annual pay rise given to these employees was below the average of 8 percent. Its pay awards to below management-level staff were also below the industry average, while it was also below average when it came to employee mobility, either through promotion or lateral movements.

SJM does have a solid policy to support SMEs, launching the SJM and Macau SME Procurement Partnership Program in conjunction with the Macau Chamber of Commerce in 2016.

As of the end of 2018, SJM said some 1,250 local suppliers had enrolled in the program, with total procurement from local SMEs that year at more than MOP900 million.

Like its rivals, SJM has been active in the local community, offering a scholarship program to the University of Macau and sponsoring cultural events, such as the Macau Literary Festival and the Macau Food Festival. It’s also the headline sponsor of the Macau Formula 3 Racing Team.

It came second to Wynn Resorts when it came to charitable and community donations, in 2014.

Sands China

Upgrades to boost premium share

Sands China dominates gaming in Macau and has arguably gone further than most of its peers in satisfying the government’s demands for a mass-market oriented product offering with substantial non-gaming elements.

Sands Macao was the first Vegas-style casino to open in 2004, while The Venetian was the first integrated resort, opening on the Cotai Strip in 2007. Since then the company has gone on to open Sands Cotai Central, the Plaza Macau and most recently its French-themed IR, The Parisian.

With more than 11,800 hotel rooms, Sands China dominates supply, accounting for around one third of the total room availability in Macau. In a city notoriously short of hotel space, the advantage of scale has enabled Sands China to maintain lower room rates to attract the higher-margin mass market gambler.

Sands has by far the largest segment of the mass market at about 30 percent, compared with 18 percent for Galaxy Entertainment, according to Bernstein Research. It’s forecast to end the year with a 24 percent share of overall gross gambling revenue, compared with 21 percent for Galaxy.

Sands, like its rivals, has already far exceeded its capital commitments to the government at the time its license was granted and is now spending a further $2.2 billion on renovations to its existing properties.

The upgrades are focused on improving its room quality and VIP facilities with a view to capturing a greater share of the premium mass market.

At the Venetian, renovation work began in 2018 to refurbish the VIP and premium mass gaming rooms, which will include more private gaming rooms. Construction is expected to be completed in phases throughout next year.

At the Plaza Macau, the company is adding the Four Seasons Tower Suites, which includes 290 premium suites. The project is expected to be completed in the first quarter of 2020. It has already completed renovation of Plaza Level 2 and has now begun concept design work for a full upgrade of Plaza Level 1.

At the Parisian, a number of standard rooms have been combined to provide more space, while suites have also been upgraded.

The most ambitious renovation work includes a complete revamp of Sands Cotai Central into a London-themed resort, with David Beckham as its brand ambassador. The resort will include scale-replicas of the Houses of Parliament and Big Ben and will add 370 luxury suites.

“While Sands China has had quantity in rooms, it has fallen short of having competitively high-quality rooms and highend suites,” Bernstein wrote in a recent note. “However, Sands is now not only adding capacity, but also redeveloping/ upscaling its properties. When the redevelopment is complete, Sands will stand to benefit from the expected growth in premium mass gaming segment in Macau.”

Bernstein has said that it expects Sands to dominate the market in Asia for the next five years at least, as it “dwarfs its competitors” in market share, margins, free cash flow generation and return of capital to investors.

When the government released its interim review, Sands had by far the largest level of revenue from non-gaming of all six operators at 21 percent. According to the company’s interim report that ratio has remained stable.

While Sands China has had quantity in rooms, it has fallen short of having competitively highquality rooms and high-end suites.

The properties feature extensive retail and MICE facilities, while Sands has a consistent roster of big name stars, ranging from Celine Dion to Hacken Lee, performing in its theatres.

For Q3, Sands China saw net revenue fall 2.0 percent, compared to the third quarter of 2018, to US$2.11 billion, while net income remained flat at US$454 million.

Adjusted property EBITDA was US$755 million, consistent with the prior year, led by a 9 percent gain in the mass market segment, while VIP rolling volume was down across all of its properties.

At the time of the government review, Sands was deemed to be below average in terms of local employees in its management ranks, although its pay awards for both managerial and non-managerial positions was above the average. It scored above average in the potential for upward mobility, but below when it came to lateral movement within the company.

Sands, like its peers, also has a program designed to support small-to-medium-sized enterprises in response to the government’s policy prodding IR operators to prioritise local procurement. As of 2017, the company said 79 percent of its procurement spending had been gone to Macau businesses.

Last year, the company spent MOP6.7 million on charitable donations in eight fields, including education, low-income families and social rehabilitation. Ten years ago, it set up the Sands Cares Ambassador Program to formalise the work of its staff in volunteering in the community.

Galaxy Entertainment

Landbank to lead growth

From its origins as a local building company, Galaxy Entertainment Group, has expanded into one of the most formidable of Macau’s casino operators, vying with Sands China for top market share.

One of the three original concessionaires, Galaxy operates the VIP-focused StarWorld Hotel, Galaxy Macau, Broadway Macau and the City Clubs.

It opened its first City Club casino, the Casino Waldo, in 2004, just two years after beating out an international field of more seasoned operators for a license. The group then expanded rapidly, rolling out a further three city casinos and its StarWorld complex in 2006, before going on to debut its Galaxy Macau integrated resort in 2011.

In land-scarce Macau, Galaxy has the largest undeveloped land bank and is currently planning Phases 3 and 4 of its resort complex. These phases will double its Cotai footprint to more than two million square metres and are expected to focus on non-gaming activities, primarily targeting MICE activities.

The expansion will include 4,500 hotel rooms, including family and premium high-end rooms, 400,000 square feet of MICE space, a 500,000 square feet 16,000-seat multi-purpose arena, F&B, retail and casinos.

Galaxy is also currently the only operator to be actively developing a project on Hengqin Island, adjacent to Macau. The area has been earmarked by China for entertainment and leisure activities, though no gaming will be permitted. Analysts see development of Hengqin as key to helping to develop Macau’s mass market, providing the space that Macau lacks for the development of more lower-cost hotel rooms.

Galaxy says its resort on Hengqin will be on a 2.7 km land parcel and will be a low density IR to “complement” its high-energy resorts in Macau itself.

Like its peers in Macau, Galaxy is looking at expansion plans overseas and in 2015 made a strategic investment in Monaco’s Societe Anonyme des Bains de Mer for a license bid in Japan. Closer to home, in 2018, Galaxy also bought a 4.9 percent stake in Wynn Resorts, which it said was an investment opportunity.

The group saw its market share slip in Q3, as properties with newer product offerings such as Melco Resorts & Entertainment and MGM China, won away business and as an ongoing HK$1.5 billion renovation project at Galaxy and Starworld disrupted operations. Its total share stood at about 19.9 percent at the end of the quarter down from 21.3 percent in the same period the prior year.

Its share of the VIP market was still dominant at 25 percent, down from 26 percent, while its mass share was 17 percent, down from 18 percent a year earlier. Analysts note that the company’s business mix has improved with VIP now at 45 percent of total gross gambling revenue, the lowest level in the group’s history. While non-gaming revenue made up about 11 percent in 2018, up from just 4 percent in 2014, when the government carried out its interim report.

Analysts say that the company remains vulnerable in the short term to the slowdown in the VIP market, although its strong development pipeline put it in a strong position in the longer term.

“Over the long run, with the future development of Galaxy Macau Phases 3 and 4, the company stands to have outsized growth,” Bernstein notes. “Long-term investors should be interested in Galaxy’s future growth (Phases 3-4 in particular) which are not fully being priced in today.”

Galaxy claims to have been the first of Macau’s operators to launch a scheme to help foster small and medium-sized businesses, with its “Large-Businesses-Leading-Small- Businesses” model. The group says the majority of its procurement is now from local companies, with its Broadway Macau property in particular supported by SMEs.

The group, like its peers, also has a strong corporate social responsibility program, launching its HK$1.3 billion Galaxy Entertainment Group Foundation in 2014, which is focused on education, both in Macau and Mainland China.

Its volunteer team, launched in 2011, has so far organized 200 activities, contributing more than 10,000 hours in community service.

Wynn

Premium to provide the Wynn-ing ticket

Wynn Resorts’ properties embody the ultimate luxury experience and Macau is no exception, with its two IRs bearing testament to its now disgraced founder’s minute attention to detail and design.

With the government’s push to see a broader mass market tourism base and the downturn in the VIP market due to the slowdown in the Mainland economy, that may be seen as a negative for Wynn, at least in the short term.

However, analysts at Bernstein says this is a mistaken impression. The company has the second-highest share of the VIP market after Galaxy Entertainment, at about 20 percent, but the segment only makes up 20 percent of EBITDA. The real driver for growth has been in the premium mass market, which is projected to see strong future expansion as China’s middle class grows. The company has also outperformed peers in the mass sector.

Wynn has a share of about 13 percent of the mass market, behind Sands, Galaxy and Melco.

“Wynn has shown stronger overall growth in its mass tables business than the overall market and the mass tables business delivers superior table yields,” Bernstein said in an in-depth note on the company. “Wynn has one of the best operating efficiency models in Macau, with 160 percent+ fair share in tables. Both Macau properties deliver above-average margins and generate some of the highest Mass GGR per room.”

Wynn opened its first property in Macau in 2006 on the Peninsula, expanding the resort to include more gaming space, retail and food and beverage options in December the following year.

In 2010, it opened the 400-room Encore tower, which is currently coming to the end of more renovation work at a cost of about $125 million. It’s adding new F&B outlets near the West Casino, aiming to offer a premium experience to the mass market.

Wynn opened its second property, the Wynn Palace, on Cotai in August, 2016, significantly expanding its capacity. The resort features a cable-car ride around a central performance lake and contains displays of precious Chinese artwork.

Wynn has shown stronger overall growth in its mass tables business than the overall market and the mass tables business delivers superior table yields.

Steve Wynn has expressed a commitment to returning Chinese artworks to China and has made several high-profile purchases at auction, such as the $12.8 million acquisition in 2011 of four Qing Dynasty Jiaqing-era vases at a Christie’s auction in London and the 2006 purchase of a red Hongqu period vase.

However, association with the Wynn name is now seen as a liability for the company after Wynn faced multiple allegations of sexual misconduct and was ousted from the company last year. Executives were called in to speak with the regulator,the Gaming Inspection and Coordination Bureau, over the allegations facing its founder.

In the future, expansion of Wynn Palace is expected to be a key driver for growth.

Construction for Wynn Resorts’ Phase 1 South Parcel Pavilion and 650-room hotel tower is expected to commence in late 2021, with costs estimated at US$2 billion.

The Crystal Pavilion is described by the company as a “must-see” tourist attraction, featuring an innovative architectural design with an all-glass structure.

The expansion will ultimately also include two-phased hotel towers with a total of 1,300 luxury rooms and suites, entertainment attractions, a 270-degree fully immersive entertainment theater, and a food hall offering a variety of regional Asian cuisines.

According to the company’s presentation, the project is expected to be completed in 2024.

At the time of the government’s interim review Wynn derived about 13 percent of its revenue from nongaming activities. As of end-June, the proportion was 14 percent, according to the company’s interim report.

In terms of employing locals in management level positions, Wynn scored above average to its peers, while it was below average in the metrics of upward and sideways mobility and the level of pay increases. Melco and MGM consistently awarded above average pay increases, the report found.

In 2014, it overtook SJM Holdings to become the largest contributor to charitable causes and has consistently been one of the biggest donors.

MGM

Jewel in the crown boosts MGM’s market share

MGM China doubled its footprint with the opening of its HK$27 billion ($3.4 billion) Cotai property in 2018 and analysts currently view the operator as one of the best placed to gain market share, especially in the premium mass segment.

MGM Cotai made its debut shortly ahead of Chinese New Year after two years of delays. Even then, it opened without its luxury Mansion Suites and VIP rooms and analysts at the time described the resort, whose architecture is designed to resemble stacked jewelry boxes, as underwhelming.

Now the property is ramping up strongly, driven in part by its innovative, high-tech nongaming elements.

The property features what it claims is the world’s largest display of permanent LED video screens, with 25 that are four storeys high and as long as a football field. The screens are housed within a giant atrium, known as the Spectacle, which is the world record holder for the largest free-span gridshell glazed roof.

The resort also features Asia’s first dynamic theatre, which was designed by the creator of the Cirque de Soleil theatres in Las Vegas, as well as an impressive art collection.

The casino floor offers approximately 27,696 square meters, with 1,203 slot machines and 261 gaming tables as at June 30, 2019. The hotel comprises two towers with 1,363 hotel rooms, suites and skylofts, 12 diverse restaurants and bars, retail outlets, approximately 2,870 square meters of meeting space and other nongaming offerings.

“The scale of MGM COTAI allows us to capitalize on our international expertise in providing exciting and diversified entertainment offerings,” the company says.

According to Nomura Research, its market share rose to 9.9 percent in volume terms in Q3, compared with 8 percent the same period a year ago. In VIP, its share rose to 8.9 percent from 6.9 percent, while its share of mass was 10.7 percent.

Analysts expect its market share to continue to rise with the Mansion on Cotai now fully functional, giving the company greater traction in both premium mass and VIP.

Like Melco Resorts & Entertainment, MGM has focused on the high-margin premium mass segment. At the end of June, it reported 62 percent of revenue from the mass market and 38 percent from the VIP, which is a slightly better split than the industry average.

The company has noted however that there is a continuing migration of market share from Peninsula Macau, where its first property opened in 2007. It is now seeking to mitigate the impact by renovating the gaming space for its high-value main floor players.

As part of those efforts, MGM Macau has reallocated tables from VIP areas to the main floor to maximise its yield. It has also stepped up its marketing and player loyalty efforts through customer service and promotions through its Golden Lion Club.

At the time of the government’s interim review, MGM derived just five percent of its revenue from non-gaming activities.

The company had a lower percentage of locals employed in management levels and above, though its pay awards and efforts to upwardly promote local staff were “superior” to the industry average. It was below average when it came to lateral movements within the company.

MGM has 10,000 employees, with nearly 20 percent of them being employed since the beginning. It is co-chaired by Pansy Ho, daughter of the legendary Stanley Ho, founder of SJM Holdings.

MGM is a sub-concession of SJM and like the Macanese company recently had its license extended until 2022 to bring it in line with the expiry date of the other operators.

Melco Resorts & Entertainment

Morpheus generates dream yields

Melco Resorts & Entertainment has been gaining market share as its $1.1 billion Morpheus property, which opened in June last year, gains momentum.

The 770-room hotel, with its exoskeletal design by late architect Dame Zaha Hadid, has won multiple architectural accolades and was part of the third phase in the development of Melco’s City of Dreams resort.

The IR has been revamped and rebranded with a Nuwa hotel replacing the Crown Towers. Nuwa is described as being chic and classic Chinese, while the old Hard Rock Hotel tower is being replaced by the Libertine, which has been designed to attract a “funkier” crowd and is scheduled to open in 2021.

The company owns the City of Dreams, the Hollywood-themed Studio City, VIP-focused property Altira Macau and the Mocha Clubs. It also has the City of Dreams in Manila, is developing a property on the island of Cyprus and is pushing hard for a license in Japan.

One of Macau’s three locally grown gaming companies, it had originally teamed up with Australia’s Crown Resorts to develop its properties. Melco bought out its partner in 2017, ending one of the most successful ventures in gaming. However, earlier this year, it announced it was buying a stake in the Australian company.

Melco was the biggest gainer in gaming market share in Q3, up 310 basis points from the same point last year. Nomura estimates Melco had a 22.1 percent share of the overall market in the latest quarter, compared with 16.4 percent a year ago. Its share of the VIP market has gone from 16.6 percent to 24.5 percent in volume terms.

“Over 12 months ago, we argued week after week that investors should overweight MLCO and MGM on the thesis that their innovative and compelling new capacity on Cotai would lead to share gains,” Nomura analysts wrote in a note.

The firm managed to post growth in both the VIP and the mass table segments in Q3, bucking the trend for a general downturn in the high-roller segment.

Analysts expect the group to continue to outperform, with its mass-market-focused Studio City property likely to benefit from infrastructure improvements. The resort has struggled to find its feet, in part because of its location at the far end of the Cotai Strip. However, analysts say the eventual opening of long-delayed light rail links will benefit Studio City as it’s the first resort travellers will encounter coming from China over the Lotus Bridge.

Like its peers in the government’s interim review, Melco has met all of its commitments in terms of capital deployed. However, it had a lower number of locals employed in management-level positions than its peers at the time of the review, which was released in 2016. Its pay awards were higher than average both at the management and non-management levels, while it had a better-than-average track record in upward mobility of locals into management positions and of lateral movements between various disciplines within the resort.

On the non-gaming front, Melco’s non-gaming revenue made up 13.5 percent of its total last year, that’s an improvement from just 9 percent in 2014, the final year studied in the interim review.

The company has one of the longest-running and most successful non-gaming attractions in Macau, with the HK$2.0 billion House of Dancing Water, which opened in 2010 and which had been seen by six million people up to June this year, when its contract was renewed.

It’s also currently developing its plans for the next phase of Studio City, which will feature a larger array of non-gaming attractions.

Under the plans, the project will have two additional hotel towers with about 900 rooms, as well as a waterpark with indoor and outdoor areas. Other non-gaming attractions expected to be part of the project include MICE space, retail and food and beverage outlets and a cineplex. As of end-December last year, it had spent $39.5 million and expects to spend a further $1.35 billion to $1.4 billion to complete the project.

The company has not shied away from experimenting with its non-gaming offerings in Macau’s notoriously difficult non-gaming market. Although it has enjoyed success with the House of Dancing Water, it closed its House of Magic attraction at Studio City after just two years, while a post-apocalyptic car stunt show -- Elekron -- was not extended after a six month run this year.

Melco has a strong corporate social responsibility program, in particular when it comes to sustainability. It’s aiming to become carbon neutral and achieve zero waste by 2020, while its properties have won awards for their environmental efforts.

In January, the company teamed with a local SME to develop Macau’s largest solar array. Melco is the first integrated resort in Macau to install on-site renewable energy technology by installing over 18,000 solar photovoltaic panels covering close to 30,000 square meters of rooftop space at their flagship integrated resort City of Dreams and Studio City.