Macao's Losing Streak Worsens

China's gambling hub saw a 10% quarterly drop in gaming revenue, three times worse than last quarter's fall. Analysts say new visa restrictions are to blame

These are tough times for Macau as its growth story finally starts to slow down. Government figures released this week show that in the third quarter of 2008, Macau's gross gaming revenues were down 10% from the second quarter, a much bigger quarter-on-quarter decline than the 3.3% drop in the second quarter versus the first. Much of the blame is attributed to new visa restrictions imposed on visitors from China's Guangdong province, which limit how often they can hop across the border to Macau for a punt.

These restrictions, introduced at the beginning of September, have left Macau unusually quiet: mass gaming casino halls are subdued and the high-roller rooms, which attract the no-limit gamblers, are empty. As a result, growth has hit the brakes. Last month, year-on-year growth in total revenues fell 3%, the first slowdown since January 2006. Total revenues were down a massive 24% month-on-month.

"With Macau's gross gaming revenue growth already significantly affected by recent visa restrictions, it is likely that no further restrictions will be imposed in the short to medium term, unless Macau returns to its high growth path in the near future," says Jonathan Galaviz, a partner at Nevada-based consultancy Globalysis, which specialises in the hospitality and gaming sectors. He adds that before restrictions are lifted the Chinese government will probably want to see Macau's casino industry adopt better corporate and social responsibility standards with regards to problem gambling—something that, as yet, has not been adequately addressed.

But even if visa restrictions have reached the limit in terms of strictness, there are other stumbling blocks on the horizon.

"In terms of revenue, the next issue we've got to face is commission caps, which are a double-edged sword," says Anil Daswani, Citi's Hong Kong head of conglomerate research. Theoretically, the caps are supposed to limit how much money a casino pays to the junkets that bring in the important VIP players, and should therefore boost margins for the casino operators.

"You'd assume that margins would improve—but you have to do some basic junket maths," says Daswani. Currently a typical junket is charging 1.35% in terms of commission. Of that, 1.1% is a rebate to the player and 0.25% is the junket's gross margin. Of that margin, around 0.1% is operating costs, which leaves a net margin of 0.15%

If the commission cap is reduced to 1.25% from 1.35%, as is expected to happen by the end of this month, then a typical junket could see its net margin drop to 0.05% from 0.15%, a two thirds decline. It is possible that the junkets will pass on the costs to the players by cutting their rebate, reducing the reward for gambling, which will in turn reduce their levels of playing.

"If the player rebate is reduced from 1.1% to 1%, I would not be surprised to see revenues in Macau fall another 10% to 20% just on the back of commission caps, and that's on a month-on-month basis on current levels," says Daswani.

Some analysts are also wondering what impact Singapore's entry into the gaming industry will have on Macau, especially with regard to the VIP market. Singapore's first casino, built by Las Vegas Sands, is targeting a 2009 opening. The second one, awarded to Malaysian casino operator Genting, will follow in 2010. Singapore currently has lower gaming taxes than Macau and therefore will be attractive for high-rollers.

There is some good news for Macau, according to US investment bank Jefferies and Company. In a report released earlier this week, the bank see one positive trend coming out of the recent numbers: the length of stay by overnight visitors has increased significantly, which is mostly due to visitors staying longer in Macau's Vegas-style five-star hotels. The average length of a stay in a five-star hotel in 2006 was 1.42 days, while in the first eight months of this year it was almost 25% higher at 1.74 days. This, says the report, bodes well for Macau's long-term future.

Jefferies still believes that 2009 will be a growth year. Although it projects that gaming revenues will shrink by 2% in the final quarter of 2008, and by a further 8% in the first half of next year, it expects full year 2009 revenues to increase by 11% in total. The driver of this will be the opening in the summer of the new City of Dreams project and the first phase of the Shangri-La and Sheraton projects in Cotai. The new projects could result in revenue growth of 32% in the second half of next year, says the report.

There is very much a "build and they will come" premise to Jefferies' reasoning. But that will only be the case if customers can get a visa. "It is our belief that with negative growth in [the fourth quarter of] 2008 and into early 2009, there is little chance that China will keep the visa restrictions in place going into the new casino openings," says the report.

And then there's the global economic slowdown to take into account. Surely if a slowdown hits Asia, especially China, household expenditure on gambling will be the first to witness cut backs?

The US experience contradicts such assumptions, however, as it shows that the gaming industry holds up well in times of economic weakness. As the first recession to hit Macau's mega-casinos approaches, the hope will be that the Chinese choose to keep on gambling—and that China chooses to let them.