Macau's hotel boom threatened before opening

A major increase in hotel capacity is coming to Macau over the coming 24 months, posing a challenge to operators who are facing a sharp decline in demand.

That spells trouble for operators who are investing billions in what could be called the “Macau Dream”, in which the territory’s economy shifts from VIP segment gamblers who spend an average of one night in town to the mass market.

It models off of the transition that Las Vegas made, from a gambling-focused to a family-friendly travel and entertainment destination. However, realization of the Macau Dream is anything but certain.

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Macquarie Securities said in a note that “the massive casino resorts that will open on the Chinese territory’s Cotai Strip in the next two years will boost hotel room capacity by 65 percent.”

This month, Melco-Crown will open the 1,600-room Macau Studio City Hotel-Casino, with bigger developments on the way. At the end of this capacity increase, Macau will have added 16,000 new guest rooms.

Yet the once-hot casino gambling destination – the only within Chinese territory – has been suffering an extended earnings slump, recording 16 consecutive months of declining takings at the tables. In its note, Macquarie projected that Macau’s woes would continue at least until 2018.

"The anti-graft crusade in Mainland China is one of the main drivers," said Ben Lee, managing director at IGamiX, Macau-based gaming consultancy. "Fewer VIP players come to Macau since last year."

Next year, new massive resort developments are slated to open. Wynn Resorts is planning on opening its $4.1 billion Wynn Palace in March.. Similarly, MGM Resorts International is expected to open the $2.9 billion MGM Cotai by the end of the year.

Las Vegas Sands had planned to open the $2.7 billion Parisian Macao – complete with half-scale Eiffel Tower – in April, but this past August it announced it would not be able to make this deadline. Sands has applied for an extension for its deadline to finish the Parisian, which would be its fourth property on the Cotai Strip, in the second half of 2016.

These developments are based upon the “if you build it, they will come” principle, which is a risky bet, primarily because the industry has lost its bread and butter – the high rolling VIP segment – before making the switch to the mass market.

"The growing population, especially the large middle class and a continuing increasing income level will be the main drivers,” said Aaron Fischer, gaming and consumer analyst at Credit Lyonnais Securities Asia (CLSA).

In a recent report, CLSA noted that, for now, there are not enough casinos to meet demand in Asia Pacific and that also means that there are not enough hotels.

“We ask whether Asia has too many casinos; and we’re pleased that their views are consistent with our findings that Asia remains an undersupplied gaming region,” noted the CLSA's report.

Most of the damage to Macau’s VIP clientele can be attributed to Chinese president Xi Jinping’s far-reaching anti-corruption campaign and significantly slower economic growth on the mainland. That same growth slowdown has also hindered mass market growth, for now.

President Xi visited Macau late last year and exhorted it to diversify its development away from its recent near-total reliance upon casino gambling.

Chinese officials have said that they will support Macau, with concrete actions expected to be announced in the coming weeks. Analysts are expecting the pending moves to make it easier for the Chinese mass market to visit Macau.  

Depending on the actions taken, the timing could be good. During a public holiday spanning the first three days of this month, Chinese tourist arrivals increased 16.4 percent year-on-year. Optimism was contained, however, as the news came after casino revenue had dropped 33% in September, reaching a five-year low.

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