MACAU

A bridge too far?

Four months after the opening of the Hong Kong–Zhuhai–Macau Bridge (HZMB), Macau’s casino sector is weighing up its immediate impact, with most analysts agreeing the benefits will only be felt in the longer term.

The bridge, which cost almost $20 billion and was beset by delays since construction began in 2009, was finally opened by Chinese President Xi Jinping on October 23.

But amid the fanfare was a sense that a project Beijing has been keen to stress will be transformative for the region may not substantially benefit Macau’s casino operators.

Indeed, even before the bridge opened, there was confusion over whether casino shuttles would be permitted to use it, with a series of restrictions placed upon who is allowed to cross.

Back in May, the Macau Transport Bureau said individual casino shuttles would not be allowed to use the bridge, but that it was open to the casinos providing a joint shuttle service to the Macau border.

These have already begun to operate, via a third-party charter service, dropping off customers to Macau’s ferry terminals.

“I would imagine that eventually there will be more casino traffic allowed as things smooth out and an even flow begins to settle in,” Richard P Loughlin, director of operations at the Asia Pacific Consultancy (Macau) Ltd., told AGB.

Loughlin said that it is too early to draw conclusions on the bridge’s impact, a view shared by the Macau Government Tourism Office (MGTO), with director Maria Helena de Senna Fernandes noting that it would take “more time” to properly evaluate its impact.

Nonetheless, others are more bullish. Melco Resorts and Entertainment chief government affairs officer Maggie Ma noted at the MGS Entertainment Show conference in the middle of November that both City of Dreams and Studio City have been witnessing increasing traffic, which she accredited to a mix of the improved connectivity the bridge provides as well as events in Macau.

Regardless of the numbers, an important consideration for operators is the profile of those additional visitors arriving via the bridge.

“I think the profile of visitors coming across the bridge will be low end mass, if even that,” said Loughlin, who has used the bridge to travel from Macau to Hong Kong and back.

“From a Hong Kong person’s perspective, they first need to get to the departure area."

I think the profile of visitors coming across the bridge will be low end mass, if even that.

Once that’s done they arrive in the Peninsula and then have to make their way back to Cotai, which pending traffic, would be a good 30 minutes or more.

“Honestly, the novelty of driving on the bridge is a factor, plus it is cheaper, but if your intention as a player is to get from HK Central to Cotai ASAP, then the bus is not the way to go.”

So far, there has been little to suggest that additional visitors arriving via the bridge will convert into table drop.

There have even been some reports that the bridge has seen a noticeable increase in those arriving in Macau as part of unlicensed tour groups, something de Senna Fernandes at the MGTO has said she is “highly concerned” about.

Another issue is it could negatively impact the length of time visitors stay in Macau.

“What I am unsure about is whether the bridge might hurt overnight occupancy rates in Macau,” David Green, former gaming practice director with PricewaterhouseCoopers in Macau and founder of gaming consultancy Newpage Consulting, told AGB.

“If people can get to Macau early in the day, and go back to HK later that day, then hotel and F&B revenue will be lost. The issue is whether the bridge will change average length of stay for the worse,” Green said.

One area where Macau’s casinos might see a more immediate uptick is international traffic.

“Hong Kong gets a huge number of international travelers every year and with the novelty of crossing the longest sea bridge in the world along with avoiding ferries, Macau may be able to tap into more of this market,” Loughlin said.

Before the bridge opened, the consensus among analysts was that it was unlikely to have a material GGR benefit for casino operators in the short term. Early indications appear to support the view.

While the MGTO forecasts the bridge would contribute to a 7 percent year-onyear increase in visitor numbers to Macau in 2018, the profile of these visitors will not overly excite operators.

“The possibility for this to be a positive to Macau is there for sure, but it may not be the casinos who solely reap the rewards,” said Loughlin.

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. Two Macau junkets, SunCity Group and Guangdong Group, opened VIP rooms at MGM Cotai at the end of September. The company expected to add a further three before 2019. MGM’s license is due to expire in March 2020 and the government still has not offered any clarity on how it will handle the rebidding process. Some analysts have expressed concern the U.S. operators may be vulnerable to Sino-U.S. tensions.

MGM Resorts International said it has appointed former Nevada Governor Brian Sandoval as president of global gaming development to spearhead the group’s global expansion, particularly in Japan.

With the Governor joining the team, MGM Resorts President Bill Hornbuckle will now lead global casino marketing in particular to help drive growth in Macau.

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 retailmall offerings and two million square feet of MICE capacity. The company also has the biggest room inventory in Macau, making it best positioned to benefit from expansion of the mass market. Bernstein Research says Sands China is likely to be the key driver for Las Vegas Sands group revenue for the next few years.

Sands China makes up 58 percent of group profits and accounts for 23 percent of gross gambling revenue in Macau. Bernstein rates LVS an outperform with a price target of $65 a share. “Sands’ product offering is well positioned to capitalize Macau’s continued paradigm shift from VIP to Mass gaming over the long-run,” the research found. “We forecast net revenue for Sands China to grow ~9 percent CAGR from 2017 to 2022E, roughly in line with the Macau market.”

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.

It said recently it was investigating the unlawful use of its brand and name by a new Vietnamese resort in Cam Ranh Bay, Nha Trang. According to a company statement, GEG said it had found advertisements on social media marketing the upcoming opening of the resort – referred to has “Nha Trang Galaxy’s” bearing a mark extremely similar to that of GEG, with a similar Chinese name. GEG also said that photographs of the resort appear to be those of Duyen Ha Resort Cam Ranh.

The group is seeking a license in Japan along with Societe des Bains de Mer and was awarded a license for a casino in the Philippines, although that project has stalled due to political opposition.

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’s Studio City International Holdings unit recently raised a total of $359.4 million in a U.S. Initial Public Offering, with a final offer price of US$12.50 per ADS.

Bernstein said it views the IPO of Studio City as value accretive to Melco, setting the stage for a potential acquisition of the outstanding minority interest by Melco in the future.

“The IPO effectively reduced net debt at MSC, while MLCO maintained majority ownership and bought into MSC with inexpensive debt,” explained Bernstein in the note.

“The transaction provides for New Cotai a step toward monetizing its interest in Studio City and a potential path towards a future MLCO acquisition of Studio City. If Melco were to eventually buy out the minority interest in Melco, the IPO, and public market trading price also help set a price threshold,” it added.

SJM Holdings

SJM Holdings (880:HK) has 22 casinos in Macau. The company recently announced the appointment of Paul Baker, a former Genting executive, to head its Lisboa Palace IR. The opening of the $4.6 billion resort has been delayed until the second half of 2019. Duty-free retail operator China Duty-Free Group will be one of the anchor tenants of the retail space at the new resort, with 7,500 square meters of retail space on the first floor.

The company held the original gaming monopoly in Macau, under founder Stanley Ho, although its market share has been slipping in favor of the newer properties on Cotai. Analysts don’t expect any significant improvement until after the opening of the Lisboa Palace. It has one of the first concessions to expire in March 2020, along with MGM. The consensus view is the government will grant a two-year extension to bring expiry in line with the other concessionaires so they can be dealt with at once.

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.

Analysts said the ramp up of the resort is accelerating, after a relatively slow start due to construction making access to the property difficult.

Greater China attracts most mainland tourists in 2018

The Greater China region — Hong Kong, Macau and Taiwan — got the lion’s share of all outbound tourists from the mainland in 2018, according to the China Outbound Tourism Research Institute.

Arrivals to Hong Kong and Macau rose 13 percent, to 50 million and 25 million respectively, it said. About three million visited Taiwan, meaning 48 percent of the total ended in the Greater China region. Overall outbound tourists rose stand at about 162 million, which is slightly ahead of COTRI’s forecasts and represents a year-on-year growth rate of 12 percent.

However, the first half of the year saw the stronger growth of 15 percent, whereas for the second half of the year the growth rate fell to below 10 percent.

Operators face increasing geopolitical risk in 2019

Macau’s gaming concessionaires face increased geopolitical risks in 2019, said Steve Vickers, a Hong Kong-based international risk expert in his annual risk outlook report for Asia.

At most risk are US casino operators in Macau, including Sands, MGM, and Wynn Resorts, whom Vickers says sit at the “geopolitical fault line.” “Spiralling tensions with the US could spur Macau to dilute US casinos’ sectoral dominance, not least given the links between gaming tycoons and the Republican Party,” said Vickers.

With Macau’s chief executive, Fernando Chui stepping down at the end of the year, what the Macau government does with its current gaming concessionaires will be influenced by who will take up the role as the new chief executive, said Vickers. Vickers believes that Ho Ian Seng, who currently chairs the legislative assembly, is the most likely replacement for Chui.

Vickers believes that should Ho become chief executive, he could call for Chinese companies to buy into, or take over, existing gaming businesses, or simply refuse to grant new concessions to the current operators.