MACAU 2010 – Big Leap Forward

Posted: January 3, 2010 in Uncategorized


Special Commentary by:  Expert IR

Date:  3rd Jan 2010

New Trends

The year 2009 ended with mixed feelings for Macau. The good stories are the successful IPO of Wynn Resort and Sands China on the Hong Kong Stock Exchange in September and November respectively. The worrisome part of the storyline remains that this Special Administrative Region of China is still dominated by gaming industry and not what the Chinese government had hoped for, that is to transform Macau into a more balanced and diversified economy for its long-term prosperity.

So, after 10 years of reunification with China, Macau SAR has progressed leap and bound on its casino business, rising property pricing and cost of living coupled with more street demonstrations. On the changeover of Macau’s Chief Executive last month (December), the central government in Beijing has again reminded the territory to focus on putting economic diversification for Macau as the first priority to be achieved. By moving towards this strategic objective only can Macau be an integral part of Southern China’s strategic blueprint of economic progress, industry transformation and wealth creation.

Two major elements will help to shape Macau’s future roadmap They are,

(1)          The commencement of the Hong Kong-Zhuhai-Macau Bridge, to be completed in 5 years time.

(2)          Revamp of Heqin Island development plan, to become an educational hub and also “part of Macau” non-gaming related development.

The trends of development are pointing towards better utilization of landmass in Macau for productive industries (education, telecommunication, heritage tourism, logistics etc.) to gradually take shape in the territory. The new Chief Executive of Macau will have to see through this strategic transformation process, if the territory were to be fully supported by Beijing. A different person on the driver seat is better in every sense, to take a slightly different route down the path as he is not so locked in by the policies set by predecessor. Hence, the Chinese government knows this approach better than anyone. The outcome, nobody is going to lose face.

New Hope

Forget about what the investment analysts’ blind predictions about how well the gaming revenue will continue to increase year by year for Macau. They have yet to wake up from their “The sky’s the limit” sweet dream. (Indeed, a few have noticed that there’s the “limits” already put in place by Beijing – traveling visa restrictions).

The real and apparent issue is not whether there will be increase in Macau’s casino revenue, it is indeed how would the gaming industry leverages on the new trends that set future direction where Macau has to go down the road. Casino operators fail to see the moving trends will be caught in a tight spot and those who can see and seize them, will move along the “highway” to a new economic landscape of Macau. So, there is new hope but not necessary everyone see it in the right perspective and willing to adapt to the changes coming head-on.

There are four critical elements identified for the purpose of paving a way to take leverage on Macau’s new trends and new hope.

(1)   Traveling Visa Restrictions. This is definitely an element to be seriously considered for the gaming industry, as it has great direct impact on casino revenue when the going gets tough.

(2)   Enhanced F.I.T. Scope. Free & Individual Travels is an important segment to sustain economies of Macau and Hong Kong (the two SARs) in many ways. Over a longer timeframe, it remains a crucial indicator to gauge the supportive levels of Beijing towards its two Special Administrative Regions.

(3)   Gaming Domination. This will remain the Sore Thumb of Macau-Beijing relationship. Whenever that Beijing officials sense and felt threatened by Macau’s overheating gambling roars, they close the tap and make the going tough enough for the situation to cool down.

(4)   Greater Economic Participation with China. This is a strategic element of breakthrough and new hope for Macau. But first and foremost it is based on the condition that Macau government under its new Chief Executive who has a master plan with clear focus to be rolled out, over the next 5 years and beyond. Strong capital investment on non-gaming related infrastructural development for diversified industries will be the first step. Henqin Island will be the test bed. It is envisaged that MICE (Conventions) and supporting human resource development will see a better chance of taking off between the collaboration of Henqin and Cotai Strip.

Macau’s Mega Resorts

2010 is the watershed for Macau’s mega resort operators.

The credit market remains cautious but optimistic about growth, a chance to “re-negotiate” for refinancing and capital restructuring to put their balance sheets in good order.

Will Singapore Integrated Resorts bring about any significant impact on Macau?

The answer is: not a challenge at all.

Singapore IR is built on a very different landscape (with different sets of market risks & environment) as well as these are over-invested projects with long gestation period of return on investment.

Therefore, Macau mega resort industry has the upper-hand and, should focus on the following gaps of its business,

  •          Recreation of good EBITDA margins (i.e. raise the bar of the currently low margin operations).
  •          Provide greater sense of diversity (Product mix, price zoning, greater value to mid-tier segment, alignment of markets/segments & service components, etc.  Providing more of the same products is not viable).
  •          Seriously reconsider pumping up efficiency & style of Mass Gaming operation (that remains a significant growth pipeline).

Some of the mega resort operators such as Wynn and Galaxy Entertainment Group, and not to rule out Harrah’s at this watershed time will be given a pair of second wings to soar if they could make focused decision on new financing as well as their advantage (yet to fully develop landmass under their lease), that we may see a new cycle coming on stream for the good of Macau’s mega resort development into 2010 and beyond. Indeed, a promising time ahead.

Potential Outcomes

The enclosed chart shows the most probable outcomes that will shape Macau’s broader economic including categorically the gaming outlook, in the next five (5) years under the term of new Chief Executive.

  •          Outcome A+  (This is possible when Macau implements policies successfully to further integrate its non-gaming economy with mainland China, especially the Southern China provinces. Mega resorts will gain tremendous growth with loosen restriction on travels from Beijing and even comes with blessing of opening up more cities for FIT. The HK-Zhuhai-Macau Bridge will serve a great purpose to this most positive outcome). 
  •          Outcome B-   (This is only a short term scenario that may happen, aims to boost the popularity of new Chief executive. Sooner or later, Beijing would again switch gear to clamp down on travel visa. That will push Macau into Outcome D instead.)
  •          Outcome D   (This is a “locked in” situation and it can be worse than what is experienced by Macau’s casino operators currently. If Macau fails to gather steam on achieving greater economic participation with China, yet continue with the current over heated path of gambling waves).
  •          Outcome C+   (This is an interim period to watch for. It will be a testing time for Beijing to assess if Macau will to implement policies more forcefully for a balanced & diversified economy. It is envisaged that this will last for 2 -3 years from 2010, before Beijing feels comfortable to move up the scale towards opening of more cities for FIT. Therefore, a C+ can be reverted to an A+).

Final conclusion?  Let’s bet on Macau’s second growth engine.


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