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Inside Gaming: Macau adding casinos despite prolonged revenue slide

29 Nov 2015

By Howard Stutz
Macau's casino industry is down more than 35% from a year ago, but that doesn't mean the gaming market is slowing expansion plans.

Casino operators have budgeted almost $27 billion on new developments in Macau, including properties owned by Wynn Resorts Ltd., Las Vegas Sands Corp. and MGM Resorts International.

Meanwhile, Macau gaming regulators are expected to announce this week that November was the region's 18th straight month of revenue declines.

The irony is not lost on the investment community.

"We remain on the sidelines regarding the Macau market, and we expect no V-shaped recovery," said Wells Fargo Securities gaming Cameron McKnight.

The free fall started last year when the Chinese government started a crackdown on corruption that ensnared operators of high-end junket businesses tasked with bringing big spending customers to the Macau's private gambling salons.

Chinese officials hinted at taking steps to boost Macau's sagging casino industry. The speculation is that visa restrictions will be relaxed, allowing Mainland Chinese visitors to extend their stays in Macau. The gaming enclave, a 60-minute high-speed ferry ride from Hong Kong along the South China Sea, operates somewhat separately from Beijing as a Special Administrative Region.

"While we don't think this will result in an immediate sharp uptick in gross gaming revenue, we do think it will positively influence sentiment of gaming names," said Union Gaming Group director Grant Govertsen, who is based in Macau.

In his fiscal year 2016 policy address this month, Macau Chief Executive Fernando Chui — the region's top government official — said regulators will look to further strengthen supervision of the gaming industry, particularly within in the already challenged high-end market segment.

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said the investment community wasn't pleased by Chui's remarks and is "hoping for the government to potentially highlight some type of supportive measure for the industry."

Macau hit a record $45.2 billion in gaming revenue in 2013 but suffered its first annual decline in 2014, falling 2.6%. In 2015, Macau will be lucky to crack the $30 billion mark, a far cry from the $100 billion a year many analysts predicted the region would hit by 2020.

Questions are beginning to surface on whether a pipeline of new projects that will add almost 14,000 more hotel rooms, 9,700 slot machines and a requested 3,500 gaming tables will further test an already challenged marketplace.

Hong Kong-based Galaxy Entertainment opened two expansions to the Galaxy Macau in May while Melco Crown's $3.2 billion Macau Studio City development opened at the end of October. Las Vegas Sands will open a 400-room nongaming St. Regis hotel in December that is part of the Sands Cotai Central development.

Studio City is in the spotlight. Analysts want to know if the resort, which has 2,000 hotel rooms, will grow the middle market customer or simply take business away from existing operators.

"Mass market gaming and visitation trends in the wake of the Studio City opening (are) the most instructive near-term data points emerging from the Macau market," Wieczynski said.

Analysts are also watching how the Macau government allocates its gaming tables. So far, the regulators have been reducing the requested figures.

Studio City, for example, wanted 400 tables and received just 250. Galaxy was given 212 gaming tables, less than half of the 500 the company requested.

The table game allocations caused Wynn Resorts Chairman Steve Wynn to have a meltdown on his company's third quarter earnings conference call in October. Wynn wants 500 gaming tables for its $4.1 billion Wynn Palace, but had not been told at the time how many the resort would receive for the 1,700-room resort.

Wynn referred to the government's table game limits as "the single most counterintuitive and irrational decision that was ever made." Because Macau won't tell Wynn how many tables Wynn Palace can operate, the company has no idea how many casino floor personnel to hire.

Two weeks ago, Wynn said construction delays would push back Wynn Palace's opening three months to June 25.

Govertsen said Macau officials have not given any hint toward its decision making process. He said the number of tables might be allocated solely on nongaming amenities.

The Parisian Macao, Las Vegas Sands' 3,000-hotel-room, $2.7 billion development with a faux Eiffel Tower, is expected to open in the second half of 2016. MGM plans to open its $3.1 billion MGM Cotai by the end of the year.

"It is our view that the Parisian will likely be the most heavily visited property in Macau due to its inclusion of the Eiffel Tower replica," Govertsen said.

Govertsen said the MGM development, which has 1,500 hotel rooms and is seeking 500 table games, will more than double the company's capacity in the Macau. MGM operates just the 600-room MGM Macau, while Wynn and Las Vegas Sands have multiple resorts.

"No company has as much upside leverage as MGM when it opens its Cotai project," he said.

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