Skip to main content

A couple walks on a waterfront in front of Casino Lisboa, owned by Sociedade de Turismo e Diversoes de Macau S.A.R.L. (STDM), in Macau on the evening of April 4, 2011.BOBBY YIP/Reuters



Some of the world's biggest casino operators are betting that Chinese moms and pops who like to gamble and also want to shop and dine will turbocharge growth over the next few years at Macau, the world's biggest gambling destination.

Macau, located on the Southern tip of China and an hour away by ferry from Hong Kong, has so far relied heavily on China's young and wealthy for casino revenues, which totaled about $24-billion (U.S.) in 2010 - well above what Las Vegas earned.

Galaxy Entertainment Group's new $1.9-billion resort that is set to open on May 15 and Sands China's upcoming casino are targeting China's burgeoning middle class, rather than the high-rollers it's used to pulling in.

The potential shift of growth drivers from the volatile VIP segment, which brings in 70 per cent of the gambling revenues, to the so called 'mass market' is a welcome development for Macau, which has been focusing on diversifying its economy away from gaming.

The development also comes with its challenges, as Macau visitors have focused mainly on gambling and less on leisure activities such as shows and shopping.

"The VIP market depends on a few number of people, the mass market is a big number. We encourage and we prefer the mass market growing faster," said Manuel Joaquim Das Neves, Director of Macau's Gaming Inspection and Coordination Bureau (DICJ).

The casino market in Macau, the only place in China where casino gambling is legal, is likely to double in size to $50-billion between 2013-2015, according to Goldman Sachs.

Galaxy's new resort will have features such as a sky-top wave pool, a 350 ton man-made beach, and a multiplex cinema.

"I think Macau as a destination resort will continue to grow and that will continue to bring in guests in every segment in enhanced numbers to Macau," Michael Mecca, President and Chief Operating Officer of Galaxy, told Reuters.

"With the scope of properties in Cotai, there is much more of a focus on the mass market," he said, referring to the city's Cotai strip, modeled as Asia's answer to Vegas' neon alley, where the new casino resorts are situated.

Galaxy, nearly 20 per cent owned by private equity firm Permira, competes in the former Portuguese colony with billionaire Sheldon Adelson's Sands China, casino magnate Steve Wynn's Wynn Macau, MGM Resorts International's Macau venture and Stanley Ho's SJM.

Mr. Ho, dubbed the "Macau gambling king," for his dominance prior to the opening up of the gaming market in 2002, has an empire that still controls around 30 per cent of Macau's market.

Macau's VIP sector depends on the highly murky junket system, - licensed middlemen who extend millions of dollars in credit to mainland gamblers and assume responsibility for loan repayment, often indelicately, authorities say.

Such revenue streams are vulnerable to the availability of credit, suffering if China's clampdown on excess liquidity trickles down into the opaque junket system.

"The thing that keeps me up at night in respect to buying Macau casino shares is the junket system. We simply don't have a great deal of disclosure on who these guys are and where they get their money from," said Philip Tulk at RBS in Hong Kong.

The rising prowess of the Chinese consumer, underscored by rising income growth, and an appreciating currency is prompting international investors to place wagers on Macau casino operators, especially those with greater exposure to the mass market.

Mr. Tulk of RBS is eyeing mass market growth at 30 per cent in percentage terms over the next 3 years, compared with 15 per cent for VIP growth in 2012 and 12 per cent in 2013.

Joanna Yang, buyside analyst for fund manager RCM in Hong Kong, said it was favourable for casino operators to have a decent mass market share given higher potential margins.

"Definitely so far we have seen mass market growing pretty decently and with the supply coming on stream then we should be expecting the mass market to grow faster," Ms. Yang said.

Fund managers including BNP Paribas, RCM and Fidelity are among the top mutual fund net buyers of Macau casino stocks, with Sands China, SJM and Galaxy among the top buys. Fidelity and RCM Asia Pacific are the second- and third-largest institutional owners of SJM, according to Thomson Reuters data.

Infrastructure developments will strengthen mass-market growth in the coming year with the high speed rail network between Guangzhou and Zhuhai dramatically reducing travel time for visitors and the expansion of Macau's key Gongbei border gate that straddles Guandong province.

In the longer term, the construction of a light transit railway and a bridge connecting Hong Kong-Zhuhai-Macau, due for completion in 2015, is set to boost arrivals further.

Galaxy's shares have surged more than 300 per cent over the past 12 months, compared with the Hang Seng Index's roughly 17 per cent gain in the same period. Other casino operators have also rocketed, posting double and triple digit increases on stellar gaming revenue growth.

"We are encouraged by first quarter GGR (gross gaming revenue) data confirming an accelerating trend of mass-market GGR growth, up 9 per cent on the quarter, outpacing 5 per cent on the quarter for VIP," Goldman said in a note.

Analysts, though cautious of short-term profit taking in the near term due to rapid share gains, are upgrading their forecasts.

Full-year revenue growth for the industry is seen between 27-35 per cent, with expectations of further demand and better supply conditions due to an increased number of hotel rooms and key infrastructure developments.

The increase in hotel room supply over the next 9-12 months, adding 8,200 rooms, or 41 per cent of supply, by will be soaked up easily, said Aaron Fischer, director of consumer and gaming research for the CLSA brokerage and investment group in Hong Kong.

The risk of strict visa restrictions is slim, with the Macau government comfortable with the pace of development amid its push to diversify the economy outside of gaming, analysts say.

Macau, a centre for smuggling and crime throughout its history, has sought to upgrade its rough-edged image with, glassy edifices, fine-dining restaurants and Playboy bunnies.

While it matches Las Vegas in kitsch and garishness, Macau pales in comparison as a leisure destination, with the proportion of non-gaming to total revenue still tiny.

But sharp increases in luxury retail spending suggest that non-gaming revenue is moving in the right direction.

Linda Switzer, Wynn Macau's director of retail, told Reuters the sophistication and desire for luxury brands by mainland guests has continued to evolve rapidly, helping Wynn develop some of the most successful retail shops in the world over the past four years.

"In several instances those shops are the number one volume stores worldwide. Certainly from a dollars per square foot point of view I would venture to say we are number one with nearly all of our brands. Growth continues to be outstanding for all," she said.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:15pm EDT.

SymbolName% changeLast
GS-N
Goldman Sachs Group
+0.59%417.69
MGM-N
MGM Resorts International
+1.31%47.21
TRI-N
Thomson Reuters Corp
-0.08%155.83
TRI-T
Thomson Reuters Corp
-0.41%210.8

Interact with The Globe