The expected significant development during the next several years will likely alter Macau's competitive environment. Similarly, the Las Vegas Strip, long considered the industry's bellwether market, will also witness a significant building boom during the same period. How will each of these markets respond to significant expansion? To assist investors in answering this question, Standard & Poor's Ratings Services has prepared this article that compares Macau and the Las Vegas Strip in the context of several broad categories, including:
ò Visitor trends;
ò Revenue mix;
ò Supply versus demand dynamics; and
ò Regulatory risk.
This article is a follow-up to a commentary, "Credit FAQ: Will Casino Operators Hit The Jackpot In Macau?" published on February 15, 2006, which also focused on prospects of the Macau gaming market.
If You Build It, They Will Come
Given the limited supply of casino-style gaming in the Far East, the liberalisation of gaming in Macau in 2001 was an opportunity for the Chinese government to entice significant capital investment to the market with the hope of transforming the city into the entertainment capital of Asia.
Macau's close location to China provides a base of potential gaming customers that is larger than anywhere else in the world. It is estimated that more than 100 million people reside within a three-hour drive, and more than 1 billion people within a three-hour flight, of Macau. During 2005, Mainland Chinese visitors to Macau numbered 10.5 million, nearly 60% of the total visitors, compared to about 4 million in 2002. Hong Kong is the second-largest feeder market to Macau, representing about 30% of visitors during 2005.
A major catalyst to the Chinese visitation upswing has been the introduction of the Facilitated Individual Travel Scheme (FIT) in 2003 by the Chinese government that relaxed travel restrictions for tourists in dozens of cities that account for more than 200 million residents. Before, Chinese nationals could travel only to selective countries, and only if they were part of tour groups. During 2005, about 50% of mainland Chinese visitors to Macau travelled under the FIT, up 52% over the 2004 level. The cities currently covered under the FIT are located mostly in the coastal areas of China where disposable income is relatively high compared with other parts of the country.
While per-day spending by visitors overall to Macau was down about 7% to $190 in 2005 compared with the prior year, visitors from Mainland China had the highest per-day spending at $282. In addition, these visitors had the longest average length of stay, at 1.4 days, compared with 1.2 days for the overall market. The expected greater population covered by the FIT as more cities and provinces are included (19 cities were added in late April 2006), the steady rise of the middle class in China, and expected growth in the per-day spending of Chinese visitors position Macau well for strong performance in the future.
Las Vegas also benefits from favourable demographics, which help to consistently drive capital investment and expansion of the market. On average, visitors to Las Vegas have not only stayed longer (3.5 nights in 2005 compared to 2.3 nights in 1970), but have also gradually increased their trip budget, both for gaming and non-gaming expenditures. During the past six years, average gaming trip budgets have risen to $627 from $559, and non-gaming trip budgets have jumped by more than 20%. In addition, the age of the average visitor has modestly declined, while the annual household income has increased - an expected trend given the aging baby boomer demographic, a key target customer for the Las Vegas Strip. In addition, this growth has come amid introduction of casino-style gaming in many jurisdictions throughout the US, unlike the limited direct competition that Macau currently faces. Similar to Macau, these favourable demographics are expected to continue over the intermediate term.
Gambling Versus Entertainment
Macau generated about $5.6 billion in gross "games of fortune" revenue during 2005, compared to about $3.5 billion during 2003. Given the favourable prospects, it is possible that Macau's gaming revenue could exceed $10 billion within the next five years. However, the revenue's composition is what makes Macau unlike any other gaming jurisdiction in the world, including the Las Vegas Strip.
Macau's rapid growth has been driven by gaming and is characterised by high-limit gamblers, both for slot machines and table games. As a result, its win-per-unit statistics are likely the highest of any gaming market in the world. However, a significant portion of its gross gaming revenue, in excess of 95% during 2005, is generated via table games compared to less than 50% on the Las Vegas Strip. This is despite Macau's having far fewer table games than slot machines, about 1,400 versus 3,400, respectively. This compares to about 3,200 and 55,000, respectively, on the Las Vegas Strip. Therefore, Macau, possessing only about 44% of the table games and 6% of slot machines contained on the Las Vegas Strip, has generated a similar level of overall gaming revenue.
Additionally, Macau's rapid expansion has come despite its lack of significant non-gaming amenities, such as restaurants, retail options, and convention/meeting space. As a result, the revenue contribution from these outlets is immaterial. Therefore, a huge potential exists for the success of non-gaming amenities in Macau, which help drive incremental customer traffic and extend the length of a customer's visit, usually resulting in higher gaming revenue. Non-gaming amenities are a major impetus behind the significant amount of capital invested on the Cotai Strip (a part of Macau).
Will Both Markets' Expansions Be Successful?
During the next five years, Macau and Las Vegas will both undergo significant expansion to capitalise on favourable demographics and meet increased demand. This investment, which is currently estimated to exceed $10 billion in Macau and $20 billion in Las Vegas, will include both gaming establishments and nongaming amenities. However, it is important to note that while many projects have been announced, particularly in Las Vegas, several are in their early stages, and uncertainty remains over their ultimate completion. Despite the positive operating momentum and good growth prospects for each market, the question still remains whether this building boom will be successful in creating incremental customer demand and revenue growth to a level sufficient to prevent oversupply.
In Macau, early indications show a lack of quality facilities to meet rising demand. The success of the Sands Macau since its opening in 2003 suggests that the market is primed to replace old model establishments with high quality destination gaming and hotel facilities. To meet higher demand, a number of new major facilities will be opened in downtown Macau during 2006 and 2007, including Galaxy Star World, Crown Macau, Wynn Macau, and MGM Grand Paradise. These casinos will focus on both the VIP and mass markets, with upscale amenities and hotel rooms. They are expected to maintain good win-per-table rates and attract customers from the older facilities currently operating downtown. To understand the magnitude of the coming development, slots are expected to increase by about 50% and gaming tables by 80% by the end of 2006.
However, the real test for the Macau market will begin in 2007 when the Cotai Strip opens for business. These facilities will add hundreds of mass-market gaming tables and thousands of slots and hotel rooms. Vast retail space and residential developments are also planned in an effort to capture non-gaming revenues. Standard & Poor's expects that this development will result in an absorption period in Macau, whereby many older, smaller operations may shut their doors. Still, given the large leveraged investment taken on by operators in this market, early success in Cotai is essential to financial stability.
The established, and arguably mature, Las Vegas market has repeatedly reinvented itself, as additional capacity has historically driven higher demand and revenue. Since 1970, room supply and visitor volume have risen at a compound annual growth rate (CAGR) of 4.7% and 4.9%, respectively. However, during this same time period, revenue climbed at a CAGR of about 10% due, in part, to the increased importance of nongaming amenities as a source of revenue. Therefore, by historical standards, the market should be in a position to absorb this expected additional capacity.
However, a significant portion of it will be residential development, including condominiums and timeshare units, the magnitude of which is unprecedented in Las Vegas. This strategy, which in many instances is used as a means of partially financing some of the proposed developments, is highly dependent upon the health of the residential real estate market and as such, may result in cancellation of some planned projects. In addition, the strength of the Las Vegas market and the US economy, as this capacity begins to come on line, will be a major determining factor.
Potential Pitfalls?
While near-term regulatory risk in Macau is considered fairly moderate, Standard & Poor's views the longer-term outlook as uncertain. This assessment stems from Macau's standing as an SAR. Despite the Chinese government's appearance to be committed to transform Macau into a major resort destination, this strategy remains in its infancy, and it is uncertain as to if, and for how long, this posture may remain in place. Still, with gaming revenue accounting for 50% of Macau's GDP, Standard & Poor's believes that it is in both China's and Macau's best interest to promote and protect the industry. In addition, with its current gaming tax rate of 35% plus per-table fees and other contributions, the government's near-term incentive to increase taxes is viewed as limited. Likewise, the awarding of new concessions in 2009 is unlikely given the lack of land to support new gambling venues.
Critical to the industry's success during the next several years is the development of the physical infrastructure throughout Macau, including roads, tunnels, and trains, in addition to an appropriately trained workforce. Current plans call for the opening of a second ferry terminal between Hong Kong and Macau, the construction of a light rail transit system and network, and expansion of the Macau International Airport. The government is also expected to loosen restrictions on the recruitment of foreign labour.
Standard & Poor's views the regulatory environment in Las Vegas very favourably and considers it to be one of the more stable gaming arenas in which to operate in the US. This is evidenced by Nevada's low 6.75% gaming tax rate and its ability to refrain from significantly increasing it as a way to generate incremental tax revenue, something other states have not been able to do. This stable environment, which has existed for many years, is the direct result of the political clout Nevada's gaming companies have garnered, and comes despite no limit on the number of gaming licenses that can be awarded, including on the Las Vegas Strip. However, similar to Macau, the development of new properties on the Strip in the future is likely limited given the lack of developable vacant land. Standard & Poor's expects that this relatively stable regulatory environment is likely to continue in the future, thus partially helping to drive continued capital investment.
Expanding Beyond Gaming Will Take Time In Macau
In Macau, the development of the Cotai Strip region into the "Las Vegas Strip of Asia" will introduce, in a major way, a significant non-gaming component to a market currently characterised by a gaming-centric customer base, albeit the most favourable in the world. This is a strategy that took many years to evolve in Las Vegas and one that Standard & Poor's believes will also take some time to develop in Macau, notwithstanding potential demand in the region. In addition, the continued expansion of the Chinese economy and frequency of travel by Chinese citizens will remain factors over the intermediate term. Of interest will be the Macau market's ability to maintain high gaming volumes amid vast development and to transform itself into a destination resort. High-end hotel rooms and retail outlets may not be a concept that translates easily to visitors from China. As a frame of reference, during 2005, the hotel occupancy rate in Macau was about 71% with an average daily rate below $100.
Meanwhile, the Las Vegas Strip will once again be faced with a situation of absorbing significant additions in the face of an ever-evolving market climate. Historical performance would dictate that the market would once again redefine itself and further solidify its presence as the world's most well known. While Standard & Poor's recognises how the market has responded to increased capacity in the past, the success of this building boom will be much more highly dependent upon the U.S. economy during this period given Las Vegas' focus on the higher-end visitor and both gaming and nongaming amenities.
This article was by Michael Scerbo, Director, Corporate & Government Ratings, Standard & PoorÆs
Mary Ellen Olson, Director, Corporate & Infrastructure Ratings, Standard & PoorÆs
Sources of Statistical Information:
Standard & Poor's Ratings Services
Las Vegas Convention & Visitors Authority
Macau Special Administrative Region: Gaming Inspection and Coordination Bureau
DSEC
[The article is an extract from RatingsDirect, Standard & Poor's Ratings web-based credit research and analysis system (www.ratingsdirect.com). To learn more, please click on About RatingsDirect.]
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