All In

PUBLISHED : Friday, 23 January, 2009, 12:00am
UPDATED : Friday, 23 January, 2009, 12:00am

The figures look bad, but casino business is a tale of two markets

On the face of it, the figures coming out of Macau have been pretty terrible. Casino revenue fell for the third consecutive quarter in the three months to December, and analysts are calling for a double-digit contraction in turnover this year.

But the macro view obscures the picture. For at least the past 25 years, Macau's casinos have been characterised by two distinct, parallel lines of business.

Foremost is the so-called VIP market, which is largely credit-driven and focuses on hardcore gamblers. Because most high-roller play is to some extent financed by credit, this end of the market tends to swing dramatically with economic boom-and-bust cycles.

It's important to point out that the 2.55 per cent contraction in Macau gambling revenues during the fourth quarter was entirely (repeat: entirely) due to a credit crunch in the VIP segment.

VIP baccarat winnings, which account for 65 per cent to 70 per cent of all casino revenue, fell 7.5 per cent from a year ago. That was the first year-on-year decrease in at least three years, which is as far back as the publicly available data goes (see first chart).

The other market in Macau is the mass market, which is cash-based, walk-in business mainly from day trippers, tourists and locals.

For casino operators the mass segment is juicier because it does not involve junket agents, so the house does not have to fork out more than 45 per cent of its winnings in commissions. Even better, despite all the bad news about Macau, the mass market is actually still growing, albeit at a slower pace.

Revenue from mass-market table games rose 4.5 per cent in the fourth quarter to 6.98 billion patacas. That's about 6 per cent down from the 7.45 billion patacas quarterly average in the first nine months of the year, but all things considered, it's not bad.

Revenue from slot machines - traditionally the bottom end of the grind market - was up 29.5 per cent from a year ago (see second chart).

To be sure, the phrase 'build it and they will come' has fallen out of fashion in Macau these days. And a bubble in the VIP segment has definitely popped. But to say that growth has run out of steam misses the real story.

Stanley Ho gambles HK$1.6b with Mandarin Oriental purchase

Why would Stanley Ho Hung-sun's private Sociedade de Turismo e Diversoes de Macau (STDM) pay Shun Tak Holdings and Mandarin Oriental a hefty HK$1.6 billion for the Mandarin Oriental Macau?

The rich price represents around 20 times the hotel's 2007 earnings.

Of course, the hotel, casino and spa resort sits on a massive piece of dirt right next door to the Sands Macao - which could make a great location for a couple of new residential towers and/or a new casino. But redeveloping land into residential towers is the business of Shun Tak, not STDM. And developing casinos falls under the portfolio of SJM Holdings, not STDM.

In the near term, the plan is to hand the attached casino over to junket operator Jack Lam Yin-lok's Jimei Group. Formerly the Casino Oriental and now the Jimei Casino, it reopened last weekend after a three-month renovation (its second facelift in as many years).

Mr Lam is a serious force in Asia's massive market for high rollers, and Jimei already operates rooms in Macau's Grand Lisboa, MGM Grand, Venetian and Wynn casinos. Jimei also owns the Fontana casino in the Philippines and Seven Luck casino (whose advertisements are plastered over more than a few Hong Kong buses) in South Korea.

But STDM's long-term plans for the Mandarin probably don't stop there. Watch this space.

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