MEMORIES OF MACAU

Anna is back from Macau and Singapore and we’ve got some takeaways exclusively for you

 

 

Relative to sentiment, we are more positive on Macau following Anna’s trip there and our Singapore view remains unchanged.  We still think September will be up potentially in the mid teens but there are a few more catalysts than previously expected.  We also expect LVS and the market to get a nice boost from the opening of Phase 2 at Sands Cotai Central which even the competition seemed to acknowledge.  On the margin, the VIP outlook is probably a little better and we’re getting closer to some real infrastructure improvements that could boost Mass.  While Singapore still appears to be a slow growth market over the next year or so, investor sentiment is already there.

 

LVS and MPEL continue to be our favorite names with Macau exposure.  Here’s a summary of our updated thoughts on Asia gaming:

 

 

VIP SLOWDOWN AND FUTURE ACCELERATION

  • Although there are several theories surrounding the slowdown in Macau’s VIP market, we believe it’s a combination of several factors:
    • Europe is the top destination for Chinese exports, and economic trouble in Europe and the US are impacting the Chinese economy and hence VIP demand
    • Given what’s going on in the economy, many junkets, especially smaller ones have been more prudent in extending credit
    • Given the change over in the government that is about to occur, there is likely heightened uncertainty and sensitivity to being flashy so some players are likely waiting on the sidelines
  • Most market participants believe that the change in government in early 2013 will be a catalyst for improvement in the VIP volumes
    • New governments like to look good during their first year in power and tend to pump stimulus into the economy
    • New governments will likely announce new infrastructure projects
  • Existing infrastructure projects opening soon will help stimulate growth
    • Guangzhou Zhuhai intercity mass rapid transit:  Trial runs of the trains on the Zhuhai section could begin as soon as October.  The railway is expected to be fully operational by the end of 2012, connecting Gongbei to Guangzhou.  This should help boost tourist numbers to Macau.
    • Gongbei port expansion opening at the end of 2012
    • Bottom line is that the combination of the light rail and the border expansion are expected to shave off 4 hours round trip for visitors to Macau.  This could increase length of play by 30% for many day trippers.

 

SANDS COTAI CENTRAL: SUCCESS OR FAILURE?

 

While the rooms at Conrad and Holiday Inn are quite nice, after visiting “Site 5,” it’s hard not to notice that what’s currently open lacks the “wow factor.”  Put less nicely, Site 5 lacks a draw factor.  That said, the property is only partially open at the moment and “Site 6” is a lot more impressive than what’s currently open.  Moreover, the opening of Site 6 will also be followed by opening of the covered bridge connecting SCC to Four Seasons/Venetian which should greatly increase traffic between LVS’s Cotai Corridor.

 

Will the vanilla offering at SCC cause it to be a flop? We don’t think so.  Why?

  • The opening of Site 5 didn’t really do much to boost LVS’s market share and expectations are fairly low
  • Macau is still massively under-supplied on the room front
  • Holiday Inn brand offers compelling value since the rooms are a lot nicer than the moniker suggests and Chinese tend to like a good deal.  So worst case scenario, SCC can serve as a dormitory for Venetian which should drive Mass revenues.
  • LVS has finally begun advertising the amenities of SCC this week

 

PROMOTIONAL ENVIRONMENT

  • Seems to be stable
  • While junket commissions have increased, this seems more of a function of junket consolidation and large players reaching higher volumes and therefore, getting a larger revenue share percentage. 
  • The other reason for an uptick in commissions is that for a while now, more and more junkets are moving to a revenue share compensation plan from a RC compensation plan.  Given that market hold in Macau averages around 2.95%, revenue sharing agreements with volume targets allow junkets to achieve higher compensation thresholds then just getting paid 1.25%

 MEMORIES OF MACAU - macau2

  • While many casinos operators have gotten more savvy on their Mass rewards program, we saw no evidence that anyone aside from SJM was providing rebates on Mass (SJM has been providing rebates for several years now).  Operators are getting to know their premium mass players and in an effort to retain their loyalty, they offer free rooms, F&B comps and transportation.  

 

MASS

  • Mass hold percentages can vary significantly between those properties that include chip redemption at the cage as drop and those that only include markers
  • Recent higher Mass hold percentages look sustainable (CoD, Galaxy Macau)

 

ELECTRONIC GAMES

  • Noticeably more popular than a few years ago.  Hybrid Stadium seating games where there is a live dealer and four different games played are quite popular at many casinos (Galaxy, LVS, MGM, MPEL).  Other electronic table games were also popular.

 

SINGAPORE

  • The government’s desire to drive tourism vs. gaming is abundantly clear.  While RWS and MBS couldn’t be more different, they are both similar in the respect that the casinos are discretely placed amongst a vast array of non-gaming attractions.  It’s entirely possibly to stay at RWS and not even see the casino.  The same is true of MBS – there was a massive high end mall, and lots of other attractions at this cavernous complex to keep non-gaming visitors intrigued.
  • The government is keen on protecting the countries’ residents from evils of gaming.  They have recently passed legislation including invention programs for patrons perceived to be gambling “too” much and have a fairly long list of factors that put Singaporean residents on the exclusion list.  There are also extension restrictions on casinos being able to promote gaming in Singapore, as evidenced by the recent fine on RWS. Given that about 50% of slot play and likely about 1/3 of mass play come from the local population, the 2 IRs will have a tough time growing this mature market. Any material growth of Singaporeans gambling will also likely bring further operational restrictions
  • International mass growth is constrained by the lack of hotel inventory in Singapore, and there likely won’t be much relief on that front for a few years
  • VIP play seems to be dominated by a small group of super high rollers. We believe that growth on this front will be dominated by the economic health of Asia and likely correlated to resumption of growth in Macau.  Bottom line, no one really knows what the growth profile of this market will look like.
  • The good news is that both IRs are generating a lot of cash, expectations for growth are low to non-existent from US investors, and the probability of additional gaming licenses seems extremely unlikely.

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