Macao's Gambling Problem

A looming casino glut in the gaming haven could spell trouble for other entertainment operators

Global gaming and entertainment operators have been doubling down on new casino development in Macao. This former Portuguese colony, now under the oversight of Beijing, is flat-out the fastest growing casino market in the world and is now a bigger revenue magnet than Las Vegas. Yet it could also be heading for a nasty shakeout thanks to a looming casino glut, some analysts warn.

There is no denying that Macao, the only legal gambling haven in China, is in the midst of a historic build-out of casino capacity. The biggest names in the business, such as Las Vegas Sands (LVS) and Wynn Resorts (WYNN), have just opened billion-dollar-plus casino, hotel, and retail complexes on the Chinese resort island and have even more elaborate properties in the pipeline.

Other entrants are MGM Mirage (MGM), which will open its first casino before the end of the year, and Melco-PBL Entertainment (MPEL), which raised $1.15 billion in a secondary share listing on Nasdaq last year. Even British celebrity businessman and entrepreneur Richard Branson has expressed interest in partnering with one of the license holders to open a Virgin-branded casino in Macao.

At first glance, the casino development spending spree seems justified. Macao's gaming revenues are growing an average of nearly 20% per year and were just shy of $7 billion last year, earning the enclave more than the entire Las Vegas strip. Avid Chinese gamblers, who account for 50% of the bettors, up from virtually zero five years ago, arrive in ever growing numbers.

Low Takes

But behind those headline-grabbing numbers a less glittering picture starts to emerge. The average take per table, which peaked at $10,000 per day in 2002 when Hong Kong mogul Stanley Ho still had a monopoly on the gaming industry, has been steadily falling this decade.

In 2006 the average take was just $3,200 because of the rapid overall expansion of gaming tables. It's going to get worse: As ever more properties come on stream in the next few years, that figure could reach as low as $1,800 by 2010, figures Morgan Stanley gaming analyst Rob Hart. "We've been warning investors," he says.

Hong Kong gaming analyst Gabriel Chan agrees. For companies with big exposures to the Macao gaming scene, "share prices will be very volatile and bumpy this year," he says. The supply of tables will increase by 40%, while revenues overall are expected to grow just 16%. "All vulnerable stocks will be affected," he says.

Croupier Shortage

Melco PBL, which is the closest thing to a pure Macao play among the U.S.-listed stocks, is already showing fatigue. It's down 27% this year, closing at $15.48 on Mar. 15, well below its $19 IPO price. Las Vegas Sands and Wynn Resorts are down more than 20% off highs set earlier this year.

Indeed, the number of tables is expected to increase fivefold from 2,000 at the beginning of this year to 10,000 by the end of 2010. And the culprit is seemingly nonstop new casino development.

So far this year, Stanley Ho's Sociedade de Jogos de Macao has opened its $384 million, 300-table Grand Lisboa casino. Even now, there is a massive shortage of croupiers—table dealers who throw dice, spin roulette wheels, and deal cards—on the island. That's already putting the squeeze on margins, say analysts.

Later this year, Las Vegas Sands will take the wraps off its $2.3 billion Venetian Macau, with 800 tables and 2,000 slot machines, complete with gondolas, a convention center, and 3,000 luxury hotel suites. The MGM Grand Macau will follow this fall with an additional 340 tables.

Change in the Market

But it's not just a surge in supply that's to blame for falling revenues at the tables: There's also a fundamental shift in the nature of Macao's gaming market.

Before Stanley Ho's gaming monopoly ended in 2002, Macao was primarily a V.I.P. market, where high rollers accounted for about 74% of gaming revenues. But at the Sands Macao, which has been steadily stealing market share from established operators since it opened in 2004, about 55% of revenues now flow from mass market gamblers.

That's good news for casino operators, as the margins for mass market players are higher than for VIP rooms, where owners have to share the spoils with junket operators who bring in the high rollers.

Frugal Patrons

Ordinary mainland punters obviously spend less, and usually don't seek out high-end accommodations or spend small fortunes on Prada handbags and Tag Heuer wrist watches. Yet the more frugal gamblers are clearly driving growth now and likely will soon eclipse the big-spending segment.

There are also alternatives for the well-heeled. Casino operators outside Macao are more than willing to fly the rich, ethnic Chinese throughout Asia—the bulk of the V.I.P. market—to their gaming centers.

Given the current trend lines, most of the visitor growth is going to be mass-market. In fact, Morgan Stanley's Hart estimates these consumers will overtake the VIP business by 2008.

It may turn out that Macao ends up resembling Atlantic City more than Las Vegas. Over half the roughly 22 million visitors to Macao last year stayed less than one day.

And even those who do stay the night spend most of their time at the gaming tables or patronizing the vast local commercial sex industry than sipping champagne in the bathtubs of luxury suites or engaging in luxury retail therapy.

Image Improvement

Las Vegas Sands Chairman Sheldon Adelson and Steve Wynn have argued in the past that their resort complexes, artificial waterfalls, glitzy stage acts, and opulent hotel rooms will keep well-off families and business covention-goers coming back again and help upgrade Macao's lowbrow image.

It is true that most of the development will come on a strip of reclaimed land called Cotai that is modeled after the glitzy Las Vegas strip. In addition to the flagship Venetian Macau and Wynn Cotai, casinos there will also open up five-star hotels operated by such upscale chains as Sheraton (HOT), St. Regis, Conrad, owned by Hilton Hotels (HLT) and Four Seasons (FS).

Whether that will do the trick is anybody's guess. Right now, though, Macao is showing all the signs of an overdeveloped pleasure palace that may bring disappointing returns to the world's biggest gambling entertainment concerns.

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