Eyes on Galaxy Macau as test of mass market
Many investors in Macau casino operators are betting that mass-market punters are finally poised to step up as the key driver of future growth.
The city's soaring growth in casino revenue in the two years since the financial crisis has been driven by massive liquidity on the mainland. Beijing's stimulus effectively buoyed Macau's VIP gambling segment, which is highly reliant on mainland high-rollers and involves mainly credit-driven play.
But Macau's increased reliance on the VIP segment carries a number of implicit drawbacks. It is a low- margin business for operators due to the hefty commissions that casinos must pay the junket agents who bring in players, issue them credit and collect on their debts.
Casinos in Macau tend not to lend directly to mainland gamblers (unless they have bank accounts or hard assets overseas) because gambling debts are not legally enforceable on the mainland. In addition, the Macau government does not allow tax write-offs for uncollected gambling debts.
In turn for bearing the credit risk, junkets typically receive commissions exceeding 40 per cent of gambling revenue, while another 38 to 39 per cent is paid by casinos to the government as gaming tax, leaving operators with less than 20 per cent of casino revenue to cover all their costs and squeeze out a profit.
The VIP segment is also inherently volatile due to the credit-driven nature of high-stakes play, and is therefore highly sensitive to economic and liquidity trends on the mainland. It carries significant regulatory risk as well - junkets collecting debt on the mainland must resort to extra-judicial means to do so.
Mass-market play, on the other hand, is cash based and does not depend on junket agents, and so has a much higher margin for operators. The segment largely revolves around the steady stream of day-trip punters from Guangdong and Hong Kong.
Mass-market play is also less volatile, given its cash-based nature and the fact it involves more players gambling smaller volumes.
Analysts and investors see improving transport links in the Pearl River Delta as one of the key drivers that will boost mass-market volumes this year, allowing more people to travel more conveniently to Macau.
Still, it remains unclear whether or when Macau's mass market can meet investors' high expectations of growth. In the first three months of the year, Macau's casinos have recorded 58.52 billion patacas in revenue, a 43 per cent increase from a year ago. That puts Macau on track to add revenue equivalent to one Las Vegas Strip this year.
But this growth continues to be driven by surging high-stakes gambling volumes, as mainland high-rollers with abundant credit tirelessly test their luck on the baccarat tables.
In the first two months of the year, casino revenue rose 40 per cent to 38.43 billion patacas. However, visitor arrivals to Macau grew only 3.3 per cent to 4.24 million, while arrivals of mainland visitors increased only 6.5 per cent to 2.42 million.
A key near-term test for Macau's mass market will be whether a forthcoming resort opening can drive visitation. Only one new casino is set to open in Macau this year, the HK$15.5 billion, 2,260-room Galaxy Macau on the Cotai Strip.
Past experience shows resort openings typically drive a bump in business for their owners, and to a lesser extent for the market. But whether that will be the start of something bigger for the growth of the mass market remains to be seen.
The HK$15.5 billion Galaxy Macau on the Cotai Strip, with 450 gaming tables and 7,600 staff, will open on May: 15