Macau is on the rebound, but questions over VIP play linger

The fireworks that commemorated the grand opening of Las Vegas Sands’ $2.7 billion Parisian on Tuesday was the latest in a stretch of much-needed good news for the former Portuguese colony.

The launch, combined with the opening of Wynn Palace last month, the territory’s first winning month in more than two years and bullish sentiment among investors towards Macau sends the clear message that the territory has returned to form as a gambling powerhouse.

But amid the festivities, there remain lingering questions over the fate of VIP play in Macau– which has long dominated the top line numbers at the territory’s now 38 casino properties. There similar questions surrounding the junket operators that have facilitated the once never-ending flows of high-rollers from the Chinese mainland.

VIP play, which now accounts for about 60 percent of the island’s total gambling revenues – down from 70 percent in 2014, has continued to decline despite a stabilization of mass market play which has been spurred by a 17.5 percent increase in visitors from the Chinese mainland in 2015.

While official statistics reported that VIP revenues declined by just 15.7 percent for the second quarter of 2016 – the best performance in two years, upon review of the Big Six operators in the territory, Union Gaming analyst Grant Govertsen found that those figures to be distorted because of discrepancies in gaming table reclassifications. He found the actual decline to be “notably worse” at 21.3 percent, compared to a 4.4 percent increase for mass market revenues.

A report issued Monday by Morgan Stanley concurred, finding that VIP revenues had fallen by 21 percent for the quarter and asserting that a VIP recovery for Macau was “not in sight,” citing the fact that no new VIP tables have been allocated to newer casinos since 2015 and noting the possibility of a smoking ban in the near future.

Earlier this month, the Ian Kun Group Holding Company, which operates primarily high stakes baccarat rooms in Macau through a network of subsidiaries, reported a 75 percent year-over year decline in rolling chip turnover in August for its VIP business. Rolling chip turnover is a metric used to calculate the volume of overall VIP business and represents the quantity of “non-negotiable chips” purchased by players, which are used by casinos to calculate the commission to be paid out to VIP room promoters.

IKHG also indicated in early September that it would undergo a “strategic restructuring initiative” of its VIP gaming room operators in Macau in response to an ongoing challenging VIP environment. The first part of this restructuring was the closing of its VIP room at Sands Cotai Central. On Tuesday, it announced the closure of two more rooms – at Galaxy Macau and StarWorld – and that it “anticipates taking additional action to reduce its operating expenses and preserve its capital position in due course.”

“Given the lack of recovery in the VIP market in Macau and our expectations that this will continue for the foreseeable future, we are currently reviewing our overall operations in Macau in order to ensure their sustainability,” said Mr. Lam Man Pou, Chairman of IKGH in a statement.

Neptune Group, another VIP room operator, announced in August that it was severing ties with its VIP lounge in the Venetian Macau, and there are rumblings that it might close down its room at SCC as well.

This development came just weeks after the company issued a warning to shareholders that it would likely incur a “significant loss” for the 2016 fiscal year because of “receipt of monies from the Macau junket business continues to be slow and often delayed…the gaming environment in Macau for VIP rooms is still harsh… (and) junkets in Macau are reluctant to issue credit to players as receipt of gaming losses from players tend to be slow and protracted.”

Some properties seem to have written off VIP entirely until conditions change. Steven Wiesczynski, an analyst at Stifel, noted Wednesday that MGM’s upcoming Cotai property – to open in 2017 – “will open with a strictly mass only gaming floor until management feels there is enough demand to start adding premium mass or VIP tables.”

But there are strong indications that these VIPs won’t be coming back anytime soon. In its recent report, Morgan Stanley noted that VIP revenues for Asia, with Macau excluded, increased by 27 percent year-over-year during the second quarter – the first such increase in two years. The high rollers are still gambling, they are just going to other destinations such as Taiwan, Vladivostok, the Philippines, Cambodia and Australia.

Further, it’s becoming more profitable for junket operators to take them to such destinations.

“We think casinos and junkets earn higher margins from VIP business outside of Macau,” concluded the Morgan Stanley report. “We think outside of Macau will continue to gain share given lower effective tax rate, easing visa policy for Chinese outbound tourists, improving infrastructure and player anonymity, driving higher profitability for junkets/casinos.”

All of this isn’t necessarily terrible news for the island’s casinos, as the growth in mass-market players – which surged 4.4 percent for August – are generally much higher-margin than VIP because they don’t demand the same perks. But it prompt a rethink of what Macau’s gaming industry as to the future role of the high-rollers who have long been the bread and butter of the Macau’s gambling business.