Macau on course for $100b market by 2021

    G2E Asia, the biggest event in the show’s eight-year history, wrapped up on Thursday with one clear message from participants — Macau is likely to retain its crown as the world’s top gambling destination for years to come and the recent spate of negative news is likely to have a minimal impact.

    Deutsche Bank Securities Managing Director Andrew Zarnett reiterated his forecast that new integrated resorts under construction, improvements to infrastructure and general economic growth will propel the industry in Macau to $100 billion in revenue by 2021. Looking at every single metric, that’s a figure that should “easily” be reached, he told a panel discussion.

    The territory generated a record $45.2 billion in gambling revenue in 2013, about seven times the size of its nearest rival Las Vegas.

    Despite the impressive figures, fuelled by mainland Chinese visitors, the market remains under penetrated, with just 2.8 percent of China’s more than 1.3 billion population currently visiting, compared with 16 percent of the U.S. population visiting Las Vegas.

    Many recent headlines have been devoted to the fact China’s economy is slowing and that credit is being tightened, which will inevitably lead to a slowdown in Macau’s GGR.

    Ratings agency Fitch on Thursday maintained its current credit rating on Macau at AA-, the fourth highest, but did warn that it remains vulnerable to a hard landing in the Chinese economy.

    Economic data from the mainland has been mixed at best in 2014, with some figures raising alarm bells. The latest statistics on the manufacturing sector continue to show a contraction, although May data was the best reading so far this year.

    The HSBC/Markit Flash China Manufacturing Purchasing Managers’ Index (PMI) rose to 49.7 in May from a final reading of 48.1 in April to be at its highest since December.

    However, operators in Macau said it’s necessary to look at the bigger picture of how the Chinese economy is changing, rather than shorter-term blips on the radar.

    Kelvin Tan, Melco Crown Entertainment’s chief of international marketing, pointed to an expected boom in the middle class on the mainland, with a near doubling of their spending power over the next eight years.

    He said the number of households in the middle class bracket will jump from 256 million in 2012 to about 357 million by 2022. Domestic consumption is expected to almost triple from 1 trillion RMB to 2.7 trillion RMB in the same period, helped by factors such as increased urbanization and a tax cut for small businesses of 50 percent.

    “Most of that China middle class will be upper middle class,” he said, adding that he believes the growth projections are all realistic.

    The mass and mass premium sectors of the Macau market are already seeing the fastest growth, with the once dominant VIP sector dropping back to a just over 63 percent share. Although they generate lower revenue than the VIPs, they are three times as profitable, according to Bloomberg director of Asian research Tim Craighead.

    Improving infrastructure is also expected to be another big driver for growth, as access to Macau is opened up to other areas of the mainland.

    China already has the largest high-speed rail network in the world and has plans to double that, including a link to neighbouring Hengqin island that will connect will a light-rail system into Macau, Tan said.

    A bridge is also being built linking Hong Kong, Zhuhai and Macau that will boost accessibility and travel times and is seen as another factor supporting Macau’s sturdy growth projections.

    Kevin Clayton, Chief Marketing Officer of Galaxy Entertainment Group, said the majority of Macau’s tourists are still from neighbouring Guangdong province, but he expects that to change as infrastructure improves. “Beijing, Shanghai and the East Coast have all been good markets for us,” he said. “But you have to look at what’s coming on stream, it’s more a factor of infrastructure opening up,” he said in a panel discussion focused on how to reach the Chinese consumer.

    He said the group would tend to focus its client acquisition efforts on those areas being provided with direct access, either through new flights or faster rail links.

    Over the three days of the conference, there were few dissenting voices on the robustness of the Macau growth story. Headline revenue for the main operators is likely to see a short-term slowdown, partly because of extremely strong year on year comparisons.

    But MGM China Holdings CEO Grant Bowie said that may be good thing. “It’s like a marathon, you have to take a breather. We have to take stock of our business and I’m happy with that,” he said.

    The main growth restriction is still seen as a lack of capacity. The six resort operators are spending about $26 billion on new resorts due for completion over the next four years, which is seen as providing another boost to growth and also a means for companies to differentiate their offering, potentially broadening their customer base through greater non-gaming attractions.

    “At the moment visitors are settling for where they can get a room,” Wynn Macau President Gamal Aziz said. “When they (new resorts) open they will go where they want to go,” he said.

    The licenses of the six concessionaires come up for renewal starting in 2020 and there has been some debate the government may change the terms or allow new entrants into the market.

    David Green, principal of New Page Consulting and one of the architects of Macau’s regulatory regime, said he believed the government may still be considering the option of new licenses, but that is was highly unlikely.

    Elsewhere in Asia, the conference also heard that the timetable appears to have slipped for opening up Japan’s casino market. Originally the expectations were for the government to pass a bill legalizing casinos by the end of the current session in June. That is more likely now to happen in October, panel experts said. Still, optimism over the market’s potential still runs high, with the consensus view for potential gaming revenue at about $20 billion.