Kung hei fat choi/Gong xi fa cai. As the year of the rooster dawns, Macau reports its gaming revenue rose 3.1% in January from a year earlier, extending the world casino capital’s winning streak to six months after 26 consecutive losing months. But with shifting dates for the Chinese new year holiday – it started on January 28 this year, February 8 last year – it’s best to view January and February casino revenue as a single unit. So rather than parsing the January shard of the holiday period revenue pot, it’s a chance to step back and look at some recent trends driving Macau’s rebound, especially the split between mass and VIP revenue, plus the impact of the new Cotai resorts from Steve Wynn and Sheldon Adelson, who, like Macau casino patriarch Stanley Ho, was born in a roster year.
The gaming revenue breakdown for the fourth quarter from Macau’s gaming regulator DICJ show that VIP revenue rose 13%, mass revenue grew 7% and overall gaming revenue grew 10% from a year earlier. That fits a narrative that high rollers are driving Macau’s recovery, despite government efforts to encourage broader based tourism that brings mass market play.
That VIP story get support from fourth quarter results from Wynn Macau and Sands China. The Las Vegas Sands subsidiary’s Parisian Macao, opened in September, follows the government’s tourism plan with its half-scale Eiffel Tower leading a menu of Paris inspired attractions for the whole family, economical accommodation, dining and gaming options. Wynn Palace, on the other hand, follows the high end script of its Macau peninsula predecessor with barely a nod to the authorities’ directives. Yet fourth quarter earnings show Wynn in general and particularly Wynn Palace outperformed expectations, while Sands China disappointed.
Sands China’s adjusted property Ebitda of US$610 million was up 5% from a year ago but below estimates and “unexciting” in the present environment J.P. Morgan Regional Gaming and Lodging Analyst DS Kim says. Parisian’s estimated Ebitda run-rate of US$335 million fell short of the expected US$400 million, according to Morgan Stanley Asia Equity Analyst Praveen Choudhary. Several analysts cite Parisian’s cannibalization from other Sands Cotai properties, but Morningstar’s Chelsey Tam pushes back, noting that neighboring Venetian Macao had 99 fewer tables than a year earlier.
“Wynn Palace did not disappoint, proving that despite a soft start, Wynn’s operating model works as well on Cotai, as it does on the [Macau] Peninsula.” Buckingham Research Group Gaming and Lodging Analyst Christopher Jones says, adding Wynn’s Macau market share of 13.7% in the fourth quarter was its best in five years. Property Ebitda for Wynn Palace’s first full quarter was US$78 million and $226 million for the two properties, beating most estimates.
“We’ve consistently noted over the past two months that Wynn is highly leveraged to VIP and that the VIP segment has been accelerating and driving Macau market growth,” Well Fargo Securities Senior Analyst Cameron McKnight writes.
In Macau however, there may be more to VIP numbers than is immediately evident. “It cannot be stressed enough that the headline growth rates in 4Q16, which showed VIP (+13% year/year) growing significantly faster than mass tables (+8% year/year) are, simply put, backwards,” Union Gaming Asia Equity Analyst Grant Govertsen contends, citing the reclassification of mass tables to VIP in order to skirt the smoking ban. While the official DICJ figures count those tables in VIP revenue, casino operators report them as mass revenue in their financial filings.
Macau based Govertsen expects operating data to show VIP grew 7% and mass 13%. “In other words, and contrary to misconstrued weekly data points, the strength seen in the fourth quarter of 2016 was not primarily driven by VIP. It was driven by mass. This is very important in the context of what we see as a sustainable mass market led recovery. While we are very happy to finally see VIP turn positive (the first year/year growth since the first quarter of 2014), we remain cautious on the outlook for this segment, which is driven by increasing concerns on Beijing’s stance on capital flight.”
President Xi Jinping extending the anti-corruption crackdown to illegal money transfers out of China and the arrests of Crown Resorts employees in multiple mainland China cities have driven more high roller business to Macau junkets – casino direct VIP is perceived to carry greater risk – boosting Macau VIP revenue for now. In the longer run, mass market seems to be the better bet. Union Gaming estimates Macau’s mass revenue at 54% of the fourth quarter total, the sixth consecutive quarter for majority mass revenue.
Even Wynn Palace’s ramp up success relied on a strong mass market component, Sanford Bernstein Senior Analyst Vitaly Umansky says, while non-gaming revenue was weaker than expected and costs were higher, symptoms of a property pitched at the wrong customer segment beyond the gaming floor. Wells Fargo’s McKnight notes that, after moving Gamal Aziz out as the property’s head, management is reconfiguring Wynn Palace, adding casual dining for the mass market and seeking to “create more buzz and excitement.”
Even though Parisian’s Ebitda disappointed, in part due to cost issues as at Wynn, Morgan Stanley’s Choudhary reports Sands China’s overall mass market growth beat the market average and room nights sold at its five hotels grew 43% year on year, exceeding the 31% increase in available rooms from Parisian, another indicator that tourism is a winning play. Macau’s overnight visitors rose 10% in December, the most recent month reported, and represented more than half of total arrivals.
Macau is in a good place right now, with both VIP and mass market revenue expanding. In the long run, mass remains the better bet, though it requires more patience, more government support and, most critically, more skill.