By Kate O'Keeffe
The "build it and they will come" strategy that has earned
billions for casinos in Macau is facing its biggest test yet as a
construction binge in the Chinese city bumps up against plummeting
revenue.
Analysts and investors are questioning the strategy amid Macau's
worst-ever downturn. The Macau government reported Monday that
January gambling revenue in the territory fell 17% from the same
period last year to 23.75 billion patacas ($2.97 billion). The
decline follows December's record 30% drop and extends a dramatic
eight-month losing streak that ended five years of uninterrupted
growth. During the slump, share prices of Macau's six Hong
Kong-listed casino operators have fallen an average of 34%.
Meanwhile, casino operators are in the middle of a $23 billion
spending spree on new projects that are set to open in the next few
years, according to Union Gaming Research, an industry research
firm. The city is expected to add 62% more gambling tables and 51%
more hotel rooms by the end of 2017, Union Gaming says.
The decision to invest was made when Macau, a $44 billion market
that still rakes in seven times more gambling revenue than the Las
Vegas Strip, was growing by the size of the Strip each year.
But the world has changed since those plans were made.
Executives and analysts attribute Macau's sharp reversal of fortune
primarily to a crackdown on corruption led by China's President Xi
Jinping. In addition to bringing down many top mainland officials,
the sweeping campaign has scared off highrollers and decimated the
city's junket system, they say.
The number of Macau-registered junket operators--middlemen that
use underground banking networks to facilitate high-stakes
gambling--dropped 16% in January from the previous year to 183 from
217, according to official data released last month.
A laundry list of other challenges has also affected Macau's
lower-spending but higher margin mass market customers including
tighter visa policies for mainland Chinese visitors to Macau,
increased oversight of UnionPay cards many gamblers use to access
funds in Macau and new smoking restrictions at casinos.
All of this has put pressure on margins and forced casino
operators to re-evaluate costs. Las Vegas Sands Corp., the first
Macau casino operator to report fourth-quarter results, said it now
was looking closely at costs. "We're charged with running our
business more efficiently, examining all layers of cost...But this
has been a sea change, as you know, in a very short period of
time," said Sands President Rob Goldstein on the company's earnings
call last week.
Declining revenue isn't the only problem for expansion plans.
Casino operators remain hamstrung by the Macau government's tight
control over the supply of both labor and gambling tables. At the
same time, leaders in China and Macau have made it clear casino
operators need to invest significantly more in nongambling
facilities to further their goal of transforming the city into a
diversified entertainment hub.
It is unclear, however, what the demand may be for such
offerings in the only place in China where gambling is legal.
Galaxy Entertainment Group Ltd. and Melco Crown Entertainment
Ltd., which each say they will open expansion projects this year,
highlighted planned nongambling elements at their resorts at news
conferences last month.
Martin Scorsese directed a short film starring Robert De Niro,
Leonardo DiCaprio and Brad Pitt to promote Melco Crown's new
Hollywood-inspired resort, which will also feature a Batman
virtual-reality ride and what is being billed as Asia's highest
Ferris wheel "inspired by having two asteroids shooting through a
Gotham City building," according to a statement from the
company.
Galaxy's expansion plans include a 3,000-seat Broadway-inspired
theater, a mall with more than 200 shops and what was described as
"the world's longest skytop aquatic adventure river ride."
But visitors to Macau have so far been much more interested in
gambling than in other forms of entertainment. In response to a
question about whether there would be enough demand for all the new
theaters and arenas coming to Macau, Galaxy deputy chairman Francis
Lui said: "My short answer is: not right now."
Union Gaming analyst Grant Govertsen, who recently upgraded the
sector to "Buy," took a contrarian view on the building boom: "At
today's stock prices you're basically getting it all for free."
Write to Kate O'Keeffe at kathryn.okeeffe@wsj.com
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