The old joke, put 10 economists in a room and you will find 11 opinions, can be applied to analysts too, who seldom agree on anything.
The exception in Macau appears to be the consensus view that the future of gaming belongs to the mass-market segment. In fact, the only controversial aspect of this supposed market shift concerns exactly when this inevitable future will take hold.
Some believe that Macau will experience the decisive moment this year, when the mass-market breaks out and becomes the dominant force in the gaming sector. These analysts point to data showing mass and VIP play each account for about half of the city’s gross gaming revenue, and that the mass share is set to rise faster in the near-term.
But others say that the volatile VIP segment, still somewhat reeling from President Xi Jinping’s anti-corruption campaign, will continue to be the key indicator of Macau’s gaming strength this year, as it was in 2017.
VOLATILE VIP
The VIP segment grew approximately 26 percent in 2017, pulling aggregate gaming revenue up 19.1 percent year-on-year to approximately MOP265 billion, the highest posting since 2014. Considering the strength of the VIP segment in 2017, it is impossible to argue that VIP has become irrelevant.
Accordingly, operators that were orientated toward the VIP segment performed above expectations last year, while those more geared toward the mass-market felt the crunch, as their gaming growth edged up well below the territory’s average.
The first two months of this year indicate that 2018 may follow suit, with VIP thus far up 26 percent and mass- market just 14 percent.
But VIP has its limitations.
It cannot deliver the sustainable growth so coveted by both the Macau government and local casino operators. It is inherently more volatile than the mass-market because of its small and limited number of participants. Moreover, attracting these few participants to Macau is a complex matter that requires the partnership of junket operators with the reach and necessary skillset. VIP players are not enticed by competitive room fares or improved transportation infrastructure links, like mass-market consumers.
Estimates for VIP and mass-market contributions to 2018 gaming growth vary broadly, with some analysts putting the divide at roughly 50/50 and others suggesting VIP growth could be double that of the mass market.
Union Gaming’s Grant Govertsen told the Times that he expects the two segments to hold around the 50/50 mark. He said that he expects “low double-digit growth for mass,” adding that mass-market might grow slightly faster than premium mass.
PREMIUM PROFITS
The mass-market segment can itself be divided into two components: the ‘mass-mass’ and the ill-defined premium mass. Premium mass players wager considerably more than mass-mass ones and, although they are not technically VIP players, may be afforded similar high-end treatment.
Some analysts go as far as to suggest that there is no difference between what a premium mass player and a VIP player wagers. Vitaly Umansky, a gaming analyst at Sanford C. Bernstein, has previously said that the major difference is whether the casino or the junket promoter controls the relationship with the gaming customer.
Junket promoters are used in Macau to provide liquidity to high-stakes gamblers who would otherwise be prevented from gambling large sums of money by China’s currency controls that limit a maximum of RMB20,000 to cross the border.
The involvement of junkets complicates earnings for the casino operator.
Praveen Choudhary, an analyst at Morgan Stanley in Hong Kong, told the Financial Times that mass-market profit margins are about 40 percent, while premium mass is around 25 percent. Once junket commissions, and other ‘freebies’ are taken into account, VIP margins can be slimmer than 10 percent.
Gaming operators will go where the money is. Where there is a monetary incentive to chase the non-VIP player, gaming operators can be expected to be move quickly to position their resorts as attractive options for the mass- market consumer.
A DISAPPOINTING NEW YEAR
Though visitor arrivals are up this year, gaming results for the lucrative Chinese Lunar New Year period were disappointing, falling far short of the considerable growth seen in January.
Gross gaming revenue in February amounted to MOP24.3 billion, a 7.25 percent slowdown from the previous month, and up only 5.7 percent year-on-year, compared with January’s 36.4 percent annual rise.
CNY this year fell in mid-February, whereas the holiday season last year was split between the months of January and February. A comparison of both months year-on-year usually provides a more rounded picture. For the first two months of 2018, gross gaming revenues were up 20 percent from a year earlier. In comparison, year-on-year growth recorded in the first two months of 2017 was just 10 percent.
Secretary for Economy and Finance Lionel Leong suggested last week that the February results were not that important and that the full-quarter figures will provide a clearer picture. That has not been the case in previous years.
It remains unclear why the typically profitable CNY holiday did not bring in the expected gaming take, especially given the strong visitor arrival figures posted by the Macau Government Tourism Office.
THE COTAI MIGRATION
Not all mass-market visitors are mass-market gamblers. So looking only at visitor arrival numbers is not representative of the strength of Macau’s non-VIP gaming sector.
For Grant Govertsen, the difference is in the quality of the customer.
“There is some degree of correlation between visitor numbers and mass-market strength, however what we’re seeing now is a higher quality visitor coming to Macau’s casinos: a better customer rather than more customers. And that probably applies to all stripes of mass-market gamblers,” he said.
This view is supported by the fact that the downtown area of the Macau peninsula has seen a considerable easing in tourist congestion in recent years.
But official visitor numbers show that the tourist keep coming in and this leads others analysts to speculate that visitors are migrating to the Cotai Strip, far away from the center of activity for Macau locals.
Integrated resorts on the strip have been designed with the mass-market gambler in mind. Newer properties like Studio City, The Parisian Macao and MGM Cotai offer non-gaming attractions and avoid putting the emphasis on casino activities.
The future payout of the Cotai wager may be measured in the gradual rise of the overnight visitor, who now accounts for approximately 55 percent of all tourists. This is good news for Cotai properties because overnight visitors are less time-sensitive and more prepared to travel the breadth of Macau from the Border Gate to the ship.
Tourism | Optimistic MGTO forecast has overstated visitor arrivals since 2014
Analysts who read last week that Macau welcomed 6.5 percent more tourists during the Chinese New Year “Golden Week” will have found more evidence to support the view that the mass-market segment is soon to take over as the key driver of future gaming growth.
According to the Macau Government Tourism Office, the city welcomed 963,265 visitors during the first week of the Lunar New Year, suggesting a sustainable expansion that builds on 2016 and 2017 growth of 4 percent and 6.3 percent respectively.
However, if the estimate this year is in line with those of previous years, the figure published last month is likely an overstatement.
Since at least 2014, MGTO has overstated the estimated number of visitor arrivals during the Chinese New Year holiday period, one of the busiest in the Macau calendar. The margin of error has ranged from 0.7 percentage points in 2016 to 4.1 percentage points in 2015, but has never fallen under that of the actual figure.
Prior to 2017, MGTO provided an estimate of Lunar New Year visitors that included non-resident workers and students. However, starting from 2017, Macau immigration authorities were able to provide the daily figure separating non-residents from visitors. This change explains why the estimate fell so sharply in 2017 and yet still predicted a 9.9 percent growth in visitors.
Irrespective of the whether non-residents are included or excluded from the estimate, MGTO has overstated visitor arrivals each year, allowing it report consistently exaggerated growth. This is because each year the inflated estimate is compared with the previous year’s actual number, which is always lower than the previous year’s estimate.
With this in mind, this year’s actual increase in the number of visitors is likely to be lower than the estimated 6.5 percent growth.
Asked about the discrepancy between the MGTO estimates and the official immigration figures, a representative of the Statistics and Census Bureau said, “we cannot comment on this data [from other bureaus]. DSEC obtains [its] data from the Public Security Police Force [PSP].” MGTO also claims to source its data from the PSP, though concedes that the figures are often revised at a later date.
The PSP did not respond to a media enquiry by press time. It is scheduled to release the final figure on March 23. DB
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