We believe the various infrastructure improvements could offer major upside potential for the mass market,” say Praveen Choudhary and Calvin Ho of Morgan Stanley Research Asia/Pacific, whose “Macau Gaming & Property 2011” was published in the January issue of Inside Asian Gaming. Those improvements, Choudhary and Ho say, “should alleviate the infrastructure bottleneck within the territory and make the mass-focused Cotai Strip an easier destination for visitors. Most visitors to Macau arrive at the northern Gongbei border with Zhuhai [in Guangdong Province in mainland China].”
This is a plus because “Mass gaming revenue tends to be less volatile than VIP, which tends to follow cyclical indicators such as new loan creation and Chinese property prices,” they state. “Hence, the former should be more defensive than the latter in an industry downturn.”
NAME OF THE GAMEBut VIP is still the name of the game in Macau, and that won’t be changing any time soon.
“The VIP business has been growing at a faster rate than [the mass market] since August 2009, and stocks more leveraged to that have performed better. This is driven by easy money and credit access, plus strong GDP growth in China and Hong Kong,” the report says. “We do not expect these to change in the near term. Mass revenue per visitor is increasing, but the growth would not be as fast as VIP in the near term. Average [hotel] stay remained stagnant at 1.5 nights as well.”
The report expects the peninsula’s gross gaming revenue to grow at a healthy 15 percent rate this year in what it calls its “base case” scenario. Mass-market will increase 21 percent, VIP by 12 percent. However, the authors point out that market consensus typically starts conservative on Macau yearly revenue growth projections and then adjusts as performance plays out. Viewed in this light the Choudhary and Ho suggest that combined 25 percent year-on-year growth in gross gaming revenues across the mass and VIP markets may be possible. When sector growth rates are analyzed individually, the mass market could expand by as much as 23 percent year on year, VIP by 25 percent, possibly reaching US$30,000 in win per table per day (up from $25,000 toward the end of last year), assuming an 8 percent increase this year in the number of VIP tables.
TABLE GAME ACTION.
Table games in general and baccarat in particular will undoubtedly remain the dominant gaming action in Macau during 2011, as the report suggests. Until now, the main battleground for the six concessionaires and sub-concessionaires in Macau has been market share of the VIP baccarat trade. Baccarat hold volatility (or house “luck”) affects both the high roller and mass-market businesses and thus the profitability of both segments. But the mass segment clearly offers greater underlying profitability to operators - typically 35 percent gross margin on the mass versus typically 7 percent or even as little as 3 percent on the VIP - because of fierce competition on rolling chip commissions to junketeers and win-rate sharing. Important factors in the greater profitability of the mass segment are its lower marketing and player incentive costs because the casinos don’t need to use junkets to bring players to the table. The performance of Sands China in the third quarter of 2010 - when its EBITDA margin was boosted by a combination of the company continuing aggressively to control costs and it capturing a large percentage of the mass market (23 percent in November 2010), despite a more modest showing in VIP market share (12 percent in November 2010) - shows the inherent value of the mass market if significant volume can be built.
A key takeaway from the report is the significance of the VIP segment because of its sheer size. But the lower volatility in mass-market volumes of play (because of the segment’s lack of correlation with key economic indicators such as large-scale bank lending rates) and its better margins make for a more sustainable business.
“In the near term,” Morgan Stanley says, “we continue to like the VIP segment due to its size (72 percent of total revenue) and tremendous growth (69 percent YOY YTD). Although VIP remains more volatile, risky and prone to any downturn, we expect momentum to be sustained in the near term. The mass business, however, is more resilient, less volatile and generates a higher margin for operators. Thus we think it is likely to be the better business in the longer term.”