Analysts speaking at this year’s Global Gaming Expo Asia (G2E Asia), which took place in late May against a backdrop of 11 consecutive months of declining casino revenue as new resorts begin to come on line, disagreed on a host of issues, including whether gaming revenue or stocks have found a bottom, the timing and shape of any possible recovery, the impact of additional market supply into the teeth of this downturn and much more.

After gross gaming revenue hit a record high of 38 billion patacas (US$4.75 billion) in February last year, it slowed to a trickle during the next three months and began to decline in June. President Xi Jinping’s anti-corruption campaign in mainland China is widely seen as the principal reason for the decline.

Last year, gross gaming revenue declined by 2.6 percent—the first ever annual fall since the liberalization of the industry in 2002. It fell a further 37.1 percent in the first four months of this year. Reasons for the ongoing decline include transit visa restrictions, China’s slowing economic growth and declining housing prices, junket promoter liquidity issues, protests in Hong Kong on top of growing anti-mainland visitor sentiment in a destination many Chinese travelers visit in tandem with Macau, greater regulatory scrutiny and a mass gaming floor smoking ban instituted in October.

“What a difference a year makes,” Bloomberg Intelligence Senior Gaming Analyst Tim Craighead said. He notes earnings estimates for the six Macau operators—Sands China, SJM Holdings, Galaxy Entertainment Group, Melco Crown Entertainment, Wynn Macau and MGM China Holdings—are down 37 percent and stocks have “round tripped” since 2013. Mass market growth, the main driver of revenue expansion for the previous two-plus years, has “hit a wall,” retail sales are faltering and labor costs are rising.

MASS GAME?

“In six months, hopefully we’ll be rocking along the bottom. Part of that is on a little bit of stability we’re seeing now, specifically with VIP,” Craighead, who also serves as Bloomberg Intelligence’s director of Asian research, said. “The central issue is: do we see the mass market ready to respond to new resorts?”

The full smoking ban proposed by the Macau government represents a “wild card” that could impact both mass market and VIP, by changing duration of play for smokers, he adds. “We see a case for resumed growth in 2016, coming off a low base,” Craighead said, on the back of China’s economy structurally shifting toward consumer spending. “Macau is a bet on the China consumer growth story.”

“Macau is a pure play on Chinese outbound tourism,” CLSA Regional Head of Consumer Research Aaron Fischer said. He expects the growth rate of mainland visitor arrivals to Macau to slow from last year’s 14 percent to 9 percent over the next five years, but that will still mean an increase to 38 million visitors by 2020.

“I’m quite optimistic about Macau,” Fischer said. “There’s huge investment, $40 billion cap ex [capital expenditures], $20 billion in a short time. The Philippines is becoming more credible but has maybe $8 billion cap ex.” In the short run, though, “We forecast Macau revenue down 26 percent this year,” he said. “We’re not seeing infrastructure fast enough for mass players to replace VIPs.”

Fischer sees new resorts promoting expansion next year. “I hope new projects are interesting enough to drive mass market growth.”

“I’m struggling to see why mass market will revive,” Morgan Stanley Asia Gaming Research Head Praveen Choudhary said. Except for Melco Crown’s Studio City, now expected to open late this year, he doesn’t believe that new resorts will have enough attractions to drive market growth. Hotel occupancy and per capita tourist spending are also down, as more group travelers come to Macau, he adds.

BEAR VIEW MIRROR

Following Choudhary’s G2E Asia panel appearance, Morgan Stanley issued a report under his name along with analysts Alex Poon and Thomas Allen warning that “investors are not cautious enough” about Macau stocks. The report cites falling demand, slowing earnings, potential valuation de-ratings and regulatory issues, including a potential visitor cap, a full smoking ban and new conditions on gaming licenses that expire in 2020 and 2022.

Credit Suisse analysts Kenneth Fong, who attended G2E Asia but was not a panelist, and Isis Wong, issued a similar warning during the same week. “After all, the sector is not attractive at 23x P/E with risk for further earnings cut,” they wrote, citing continuing weakening of average daily gaming revenue.

Mainland authorities are “not out to get Macau,” Choudhary said, citing helpful initiatives such as expansion of border gate facilities and hours, rail links bringing visitors to Macau’s doorstep and joint development of Hengqin island, a couple hundred meters across the river from Cotai. Stricter transit visa enforcement is “a loophole that was closed,” while the anti-corruption crackdown and smoking ban have been “a long time coming,” he said.

“China is a father, Macau is a son. China cares a lot about Macau,” Choudhary said. “The son is addicted to Chinese visitors and gambling, and that’s not good. Let’s not rely on Chinese tourism and gaming revenue [China says]. I’m not sure that all the companies get it. Having hotel rooms and a retail mall is not necessarily enough to drive people to come here.”

“I don’t think we’re done in the VIP business [declines] either,” Choudhary, who serves as a Morgan Stanley managing director, added. “Liquidity comes down due to longer payback time [by players to junket promoters]. If payback goes to 30 days from 15 days, VIP liquidity has halved.”

Junket consolidation means the top five junkets have gone from 50 percent to 80 percent of the market, with the largest, Suncity Group, going from 20 percent to 30 percent, but Choudhary doesn’t see that helping the situation. “I’m not sure bigger junkets have any advantages,” he said. “At some point, mass will become 70-to-80 percent of gaming revenue.”

“The fear factor within China is here to stay,” Sanford C Bernstein (Hong Kong) Global Gaming Senior Analyst Vitaly Umansky said. “But at some point it becomes the norm, and people will come back to gaming. Whether they come back to Macau is another question.” He contends, “The challenge is bringing product to the market people want.”

PLOT AT THE TOP

“Studio City could drive incremental demand. It’s a potential game changer” Umansky, who once worked for the property’s minority owner New Cotai, said. “That’s the most valuable piece of land in Macau.”

Adjacent to the Lotus Bridge border crossing to Hengqin island and a stop on Macau’s light rail line, Studio City will include a figure-eight Ferris wheel built into the art deco structure, a family entertainment area with Warner Brothers and DC Comics themes featuring the Batman Dark Knight Flight ride, plus a television studio, 5,000-seat arena and The House of Magic, featuring traditional masters of illusion and prestidigitation, plus multimedia technologies in three different settings.

Umansky believes Sands China’s Parisian and Wynn Cotai, both scheduled to open in the first half of next year, could also be demand drivers. “My base case is fundamentals bottoming late this year. Mass picks up early next year,” he said.

The only investment banking analysts based in Macau, Union Gaming Research Macau, upgraded the city’s gaming sector to buy in January. “Clearly the turnaround has not happened yet,” Managing Partner Grant Govertsen said. “We seem to have stabilized at his new low of MOP19-20 billion [monthly gaming revenue].

“There’s risk to both the downside and upside from here,” he said. “In a political context, I’m not sure there’s any more pain that can be presented. I don’t think things can get worse by mainland policy. A full smoking ban represents the biggest regulatory risk.”

Elaborating on upside risk, Govertsen said there have been three major legs down for VIP revenue, May-June last year, September-October and February. “Whoever feels they’re at risk has selected themselves out of the market,” he explained. “Has the VIP market permanently changed? Probably. The first leg down presumably is lost permanently. The second and third group probably represents people who have nothing at risk in terms of corruption but are fearful in this environment. Those groups will probably come back once some kind of comfort level is found. That could happen as quickly as they left. If you’ve got a sell rating on the stock, you’re not going to see that coming. It could happen next week, it could happen a year from now.”

Govertsen fully believes that gaming revenue will repeat previous V-shaped recoveries, but he warns against looking for a turning point. “There won’t be any sign. It’ll happen quickly,” he said. “It may trickle back before it explodes back. Our contacts in VIP and premium mass say there’s pent up demand. They want to visit, to come back. Suddenly it will be MOP 23-25 billion a month.”

Govertsen thinks the lack of new resorts has hurt visitation, “I used to live in Las Vegas. Every time I go back, there’s something new and different. Macau has been the same.” Growth in Chinese travel to Korea and Japan partly reflects Macau’s absence of openings, he said. Even without a VIP recovery, he sees mass demand filling new hotel rooms.

“Studio City could reinvigorate demand in a normal environment,” he said, but Macau 2015 is a different era compared to previous openings. Along with the market malaise, he cites temporary issues related to the project, including “construction disruption” from Parisian next door cutting Studio City off from the rest of Cotai and light use of the Lotus Bridge border crossing adjacent to the property. He also notes, “Melco Crown owns 60 percent of Studio City, so it’s better to drive business to City of Dreams with 100 percent ownership.”

Govertsen said, “By 2016, maybe something will have changed on the demand side with new, more compelling properties. Then it can reinvigorate the market.”

But creating lasting mass-market growth isn’t just about new resorts. “Value for money on non-gaming needs to change. It’s changing and needs to change,” Govertsen said. “Resorts in Macau are terrific, but they don’t have the same sizzle as Las Vegas. With more resorts, they’re getting better. But Macau needs to become number one in casino resorts.”

RENEWAL ISSUES?

As if dealing with ongoing revenue difficulties was not enough, Macau operators are also facing a potentially dicey situation with casino concession renewals. Indeed, assuming Macau’s six current licensed operators will have their concessions automatically renewed ignores the history of gaming liberalization in the city and the current state of play in the world’s casino capital. Even though Secretary for Economy and Finance Lionel Leong listed “renewal of the gaming licenses” among key priorities for the government, Macau can do whatever it wants about casino concessions, which expire beginning in 2020, including reducing or increasing the number of operators.

“I suspect even in Macau and the Central Government they don’t know [what they’ll do]. I think there are some preferences that are tempered by political or economic reality,” Spectrum Asia CEO Paul Bromberg, an expert in gaming regulation, said. “Seven years is an eternity in politics, a long time in the gaming industry.”

Conditions have certainly changed since Macau opened the bidding for three concessions in late 2001 to end Stanley Ho’s 40 year casino monopoly. Back then, Macau had gaming revenue of $2 billion, roughly half of Atlantic City’s take, compared with last year’s $43.9 billion, nearly seven times the win in Las Vegas thanks to the investment of some $20 billon (and counting) in new casino facilities, including landmark integrated resorts. The city, in 2001 still recovering from the 1997 Asian economic crisis, achieved some of the world’s most stunning economic growth for a decade, creating virtual full employment and huge fiscal surpluses.

Despite all that progress, concession expiration approaches in an atmosphere that’s far less forgiving than it was 11 years ago when Macau celebrated the opening of its first non-monopoly casino, Sands Macao. Local authorities feel increased pressures from Beijing, frustrated by what is sees as Macau’s failure to implement what it believes are mutually agreed upon policies for greater oversight of the gaming industry and broadening Macau’s tourist appeal. It’s also a moment when gaming revenue, 83 percent of Macau’s government revenue in the first half of this year, continues to decline, and Macau faces increased regional competition.

Although the current government aims to handle the concession expiration issue, Chief Executive Fernando Chui will leave office in December 2019, four months before the first expirations. Beijing is likely to be more involved in both the selection of Chui’s successor and the concession issue. Even if the current six operators are granted renewals, terms could be different and even unequal, according to experts in Macau and beyond, some of whom asked to comment anonymously.

TIME TO TALK

Gaming concessions expire in 2020 for SJM Holdings and MGM China and in 2022 for Galaxy Entertainment, Wynn Macau, Melco Crown and Sands China. The Macau government says it plans to begin talks on concessions with operators next year. Upon taking office last December in the revamped cabinet for Chui’s second five-year term, Leong said the government would assess operators’ performance in gaming along with their contribution to economic diversification through non-gaming offerings.

 “The government’s aim has been a market where gaming is one of several attractions, much like a cruise ship,” Wells Fargo Securities Senior Analyst Cameron McKnight said. “We think those licensees who have contributed the most to diversification, and invested in Macau’s future, are likely to be viewed most favorably. In practical terms, we don’t know what that means, whether it’s the allocation of gaming tables or development land, or different terms on which licenses are renewed.” He notes that the authorities’ enthusiasm for non-gaming investment extends to neighboring Hengqin island in Guangdong Province, a joint development zone envisioned to complement and support land-short Macau.

Experts say it’s too early to speculate about what conditions might be attached to new concessions. Increased tax or investment requirements beyond gaming could be added and concession length shortened from the current 20 years. “Shorter licenses could impede the inevitable property reinvestment that will be needed over the 2025-2030 period, at which point the Sands Macao will be 20- plus years old, Wynn Macau 20 years old and Sands Cotai Central 13 years old,” McKnight, who is based in New York and visits Macau regularly, warned. “One thing that we’ve learned in the U.S. from the experience of Atlantic City and other destination markets is that reinvestment in the physical properties and keeping amenities fresh and current is absolutely critical to competing effectively.”

Could there also be a chance for additional casino concessions for new operators? Despite Macau’s 14 straight months of declining gaming revenue, “this could generate quite a beauty contest,” Macau gaming law expert Jorge Godinho said.

“There’d be no problem finding interested parties or capital. Macau has certainly proven itself and passed the ‘proof of concept’ stage,” McKnight said.