David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

The VIPs have checked out. It's past time for Macau's gambling industry to get used to that fact.

The Chinese high-rollers who turned Macau into the world's biggest casino destination over the past decade have been in retreat for almost two years now, in the face of a government graft crackdown and tighter restrictions on cross-border money flows. The industry is in such dire straits that a 21 percent annual drop in January gaming revenues was regarded as potentially bullish by many analysts. Even against that backdrop, the VIP segment looks weak: Revenue from high-stakes baccarat accounted for just 53 percent of the total in the September quarter, the lowest share since 2004.

The Chips Are Down
VIP baccarat's share of Macau's gaming revenues is at record lows
Source: Direccao de Inspeccao e Coordenacao de Jogos
Note: Shows gross VIP baccarat revenue as percentage of games of fortune gross revenue

That's a problem for casino operators that have invested on the prospect of VIP-style cash flows. It takes five mass-market gamblers to make up the same revenue as one VIP, Bloomberg News's Daniela Wei reported this month.

Sands China was the only one of five casino operators to generate sufficient revenue to cover its operating and capital costs in the half-year ended June, according to data compiled by Bloomberg  . Only Melco Crown, Galaxy Entertainment and Wynn Macau are over the humps of their major capex programs. SJM Holdings, the Macau casino stock with the lowest valuation, has about $2.7 billion of spending locked in for this year and next, according to analyst estimates compiled by Bloomberg: 

Money Like Water
Macau's big casinos still have a heavy capex bill facing them
Source: Analyst estimates compiled by Bloomberg
Note: 2014 figures are actual. All other numbers are consensus estimates

Still, optimists such as Bernstein's Vitaly Umansky argue that the declines have positioned the industry for more stable growth in mass-market gaming, which is less volatile and more profitable than the VIP business. New resorts such as Melco Crown's Hollywood-themed Studio City point the way.

The problem with this thesis is that Macau is no longer the only game in town for mainland Chinese leisure travelers. Back in 2013, the territory and nearby Hong Kong attracted about 61 percent of Chinese outbound tourists. That's now fallen to about 46 percent, with more far-flung Asian destinations making up the difference. The number of mainland Chinese traveling to Macau in the December quarter was just 519,000 up on the figure two years earlier. Some 2.6 million more went to Thailand, South Korea, Japan, Singapore and Malaysia: 

Lands of Plenty
Outbound Chinese tourist numbers by select destinations, quarterly
Source: Bloomberg data

Macau is solving one part of this problem simply by building more hotel rooms. With just 31,600 at the end of December, it can sell about 2.9 million room occupancies a quarter so may be butting up against hard capacity limits. About 6,000 more are under construction at the Sands, Wynn and MGM resorts due to open during 2016.

The other part of the problem will prove more challenging. As the only place within easy reach of mainland tourists where betting was legal, Macau had one hell of a unique selling point over the past decade. A gateway to the world at a time when China's economy was booming, it even attracted a disproportionate share of tourists who traveled more for glitz than gambling chips.

Those days are past, and mainlanders' horizons have broadened. China's biggest film hit during 2012 was Lost In Thailand, a comedy about a trio of Chinese who end up ... well, you get the idea. If you wanted to catch the latest world tour of Cantopop singer G.E.M., you could have gone to Las Vegas as well as Macau. At Brisbane-based Star Entertainment, normalized gross revenue from international VIPs rose 1.7 percent in the December half, bucking the declines a nine-hour flight (at least) away in Macau.

If the territory's casinos want to compete in a market where Chinese tourists are taking wing, it's time for them to forget about competing just with each other. They're up against the world now.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Data for the sixth operator, Galaxy Entertainment, wasn't available.

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David Fickling in Sydney at

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