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Drawing New Cards, Macau's Gaming Pot Builds Slower

Drawing New Cards, Macau's Gaming Pot Builds Slower

Macau's gaming scene is shifting. Mass-market gamblers now make up more than half of gross gaming revenue (GGR) and will likely continue expanding. The VIP segment slumped in the first quarter of 2019 and will not likely meaningfully recover.

S&P Global Ratings believes this change in revenue mix is structural, not temporary. One result may be slower but steadier growth for casino operators in Asia's largest gambling center.

Like a go on the roulette table, trends in the Macau gaming sector can be surprising. However, several factors indicate heavier weighting toward mass-market gaming revenues will endure. This includes policy setting that encourages tourism, not just dedicated gamblers. We also note that regional competition is intensifying, especially for the VIP crowd.

Our outlooks are stable for the Macau-based casino operators we rate. We expect stable to improving cash flows for all of them, and most operators have good cushion relative to downgrade thresholds.

A VIP Draw Goes Up In Smoke And Other Structural Headwinds

We expect Macau's GGR to fare better in the second half of 2019 after a rocky start to the year, with VIP GGR down 14.5% year-on-year in the first half. However, the VIP recovery is unlikely to be meaningful. In our view, some weakness in the first half is structural.

VIP weakness may be attributed to flows into premium mass; mass-market GGR expanded 17.2% in the first half, higher than our expectations. We believe premium-mass players moved to the VIP market to avoid a smoking ban in the mass-market areas from October 2014. They shifted back as the smoking ban extended to VIP facilities in January 2019.

Regional competition for VIP customers is another structural force that we believe will continue to weigh on this segment. NagaWorld Casino in Cambodia reported a 45.1% increase in its first-quarter VIP roll, citing visits from China. The Okada Manila's VIP roll increased by 127% over same period. Macau-based junket operators such as Tak Chun and Guangdong Group are setting up operations to bring VIP players to Cambodia, according to management at NagaCorp Ltd. In our view, competition will increase, due to lower tax rates in neighboring regional markets, investments that enhanced the comparability of assets, less stringent regulatory environments, and anti-money laundering (AML) concerns in some markets. That said, we believe weaker AML regulations can lead to bigger risk exposure. We believe the mass-market segment may be less affected by regional competition because many middle-class customers consider travel costs, time, and language when deciding where to gamble.

Table 1

Asia-Pacific Gambling Tax Rates And Anti-Money Laundering Scores
Country Tax on VIP GGR AML ranking
Macau 39% 40, 71
South Korea 20% 92
Malaysia 20% 57
Australia 10% 115
Philippines 8% 43
Singapore 5% 97
Cambodia 0% 7
Vietnam 0% 10
GGR--Gross gaming revenue. AML--Anti-money laundering.
The AML ranking is based on Basel AML Index 2018 Report by Basel Institute on Governance. It ranks countries on highest risk of AML. Macau's AML score is based on Hong Kong and China.

Overall, we believe that Macau's proximity to mainland gamblers, ease of access, and the amount of market investment will support strong visitation and gaming revenue.

We lowered our Macau GGR growth forecast to 0%-4% for full-year 2019 from 4%-8% to reflect:

VIP:   We expect declines in VIP GGR will moderate in the second half of the year but will be down 5%-10% from 2%-6% growth for the full year. The moderation is supported by easier year-on-year comparisons, although we expect the shift to premium mass from VIP GGR and the increase in regional competition to limit the pace of VIP growth.

Mass market:   We raised our mass-market GGR growth forecast to 10%-15% from 6%-10%. As a result, we expect GGR to fare better in the second half of 2019 as the VIP segment benefits from easier year-on-year comparison and mass-market growth continues to be strong.

Chart 1


Changing Revenue Mix Is A Healthy Transformation For Operators

We expect a natural expansion of EBITDA margins for operators as the mass segment represents a larger portion of GGR, tipping over 50% for the first time in the first quarter of 2019. By our estimates, mass segment profit margins are 3x-4x higher than for VIP. This is because of the absence of a junket system, which absorbs operating margins. Increasing contributions from mass customers also reduces operators' dependence on liquidity provided by VIP junket operators.

Chart 2


Steady As She Goes

Improving infrastructure and expanding hotel capacity will also support growth in Macau's gaming industry, especially in the mass market segment. New infrastructure includes the Hong Kong-Macao-Zhuhai Bridge, opened in late 2018, and the expected launch of light-rail rapid transit in late 2019. Planned hotel capacity expansions by operators should increase visitors and length of stay.

Table 2

Macau Infrastructure And Hotel Capacity Expansion Plans
Estimated completion Project Comments
Feb-18 Macau International Airport expansion North extention project completed, increased annual capacity to 7.8 million passengers from 6 million.
Feb-18 MGM Cotai opening 1,390 rooms; allocated 125 new tables and 900 slot machines.
Jun-18 MLCO Morpheus opening 770 rooms; MLCO allocated 40 new tables in January 2019.
Oct-18 Hong Kong-Zhuhai-Macau Bridge Connecting three major cities on the Pearl River Delta.
Second half 2019 Macau Light Rapid Transit Phase I Taipa section (Phase I) connecting casinos to Taipa Ferry Terminal, Macau Airport, and Lotus Checkpoint.
Second half 2019 SJM's Grand Lisboa Palace 2,000 hotel rooms, may get 100 new tables.
2020 Lisboeta 820 hotel rooms, possibility of SJM satellite.
2020 Galaxy Phase 3 1,500 hotel rooms, a casino, 16,000 capacity arena.
2020 Qingmao checkpoint A land border between Macau and Guangdong for pedestrians only, the first of its kind in Macau.
2021 Jinhai Bridge A transportation junction in Zhuhai, connecting Zhuhai Airport and Hong Kong-Zhuhai-Macau Bridge. Construction started in 2016.
2021 Galaxy Phase 4 3,000 hotel rooms, 400,000 square feet of gaming, convention, entertainment space.
2021 MLCO's Studio City Phase 2 Two hotel towers, gaming space, water park, cineplex.
Ongoing Macau International Airport expansion Target to increase airport capacity to 11 million passengers between 2025 and 2037, and to 15 million between 2033 and 2040.
TBD Wynn Palace expansion Crystal Pavilion Expansion with two phased hotel towers totaling 1,300 rooms and nongaming amenities.
TBD Macau Light Rail Transit Phase II LRT Seac Pai Van section, and Taipa to Barra section.
TBD Pearl River Delta Metropolitan Region intercity railway Several lines are under construction. The project's goal is to have every major urban center in the Yuegang'ao Greater Bay Area to be within one hour travel by rail to Guangzhou.
MLCO--Melco Resorts & Entertainment Ltd. TBD--To be determined.

Chart 3


While we believe the U.S.-China trade dispute could indirectly affect consumer sentiment, Macau remains an attractive destination for Chinese players, particularly in the mass market. This is because of lower language barriers and cost considerations given Macau's proximity. We also note that 89% of visitors to Macau are from mainland China and Hong Kong, yet penetration remains low. Residents of most Chinese cities have never visited the enclave.

We anticipate long-term demand will continue to be driven by increasing middle-class discretionary income and higher penetration into China. Visitors were up 20.6% year-on-year in the first half of 2019.

Chart 4


Chart 5


Longer term, a potential tourist tax could put some pressure on visitor growth, as the government seeks ways to manage volume. Macau's Institute for Tourism Studies estimates that 40 million visitors per year is the optimum carrying capacity. The market is rapidly approaching this level, with over 39 million visitors on a rolling-12-months basis as of June 2019 and climbing. Macau's Government Tourism Office launched a survey of citizens on a potential tourist tax, taken between May 20 and June 20. Preliminary findings suggested that the tourist tax should be set at MOP100 (Macanese pataca; $12). We expect Macau's improving infrastructure to lift the optimum carrying capacity and continue to expect visitation growth over time.

Conditions Attached To Gaming License Renewals Could Lower Returns

We view upcoming 2022 concession expirations as a credit risk. While we expect operators will extend their concessions, it will likely come at a cost that could reduce margins or return on capital. The government's renewal terms are still unclear. We believe they will probably come in some combination of economic and social consideration.

Economic consideration for concession rebids could include an upfront payment for license renewal. SJM Holdings and MGM China Holdings Ltd. both paid a $25 million fee for their recent two-year extension. It could also include additional capital investment requirements, particularly in nongaming amenities, given that the Macau government has articulated an ambitious target of 40% nongaming revenue, compared to 12.9% in 2018. In Singapore recently, Las Vegas Sands Corp. (LVSC) and Genting Singapore agreed to expand their respective integrated resorts for an estimated $3.3 billion each, including license payments, on additional nongaming amenities and property enhancements. As operators expand nongaming investments, we expect lower margins and return on capital.

Chart 6


The government may also ask for additional social considerations or safeguards for local employees such as enhanced benefits in the rebids, which could reduce operators' profitability. SJM and MGM China joined the Macau government's voluntary pension scheme for local employees as part of the conditions attached to the extension of their respective gaming rights. Wynn Resorts Ltd., Melco Resorts (Macau) Ltd. (MLCO), Sands China Ltd., and Galaxy Entertainment Group each followed.

While the gaming license rebidding process is unknown, we believe the government values stability and the amount of investment that concessionaires make in the market. As a result, we do not expect any concessionaires or subconcessionaires to lose their gaming licenses during the rebidding process. We also do not anticipate the granting of meaningful additional licenses. Macau's largest junket operator, Suncity Group, indicated interest in bidding for a casino gaming concession. However, we see the already competitive market conditions and limited land for additional development as barriers to new entrants.

Credit Implications

Our stable outlooks on the Macau-based casino operators we rate stem from stable to improving cash flows as many benefit from new properties that are ramping up operations, growth in the higher-margin mass segment, and lower development spending. Additionally, many have good cushion relative to downgrade thresholds.

Las Vegas Sands is well-positioned to navigate the Macau gaming market's transformation given its already strong focus on the mass segment and nongaming amenities, which combined generated over 90% of subsidiary Sands China's profit for the trailing 12 months ended June 30, 2019. Although we believe some modest construction disruption from planned renovations at Sands Cotai Central could arise, growth at its other properties will offset that. LVSC's strong balance sheet provides ample financial flexibility to absorb incremental development spending and weather some volatility.

Of all Macau-based operators, Wynn Resorts is probably most exposed to the VIP segment, which generated 29% of its Macau property EBITDA in 2018. However, its EBITDA mix shifted over the last year with increasing contributions from mass and nongaming as its Wynn Palace resort continues to ramp up operations. We expect Wynn Macau Ltd.'s EBITDA to be relatively flat in 2019 as challenging VIP conditions and construction disruption lead to declines. Wynn Palace continues to benefit from favorable mass-market conditions. We believe the company's large anticipated leverage cushion provides sufficient financial flexibility and mitigates the risks of possible additional development spending over the next two to three years.

We see MLCO and Studio City Co. Ltd. as well-positioned to benefit from the growing mass segment. The group MLCO generated about 85% of its EBITDA from the mass segment for the trailing 12 months ended March 31, 2019. We expect the segment continue to drive earnings for MLCO, supported by 40 new-to-market mass gaming tables in January 2019 after the opening of the Morpheus in June 2018. However, post the acquisition of a stake in Crown Resorts, we see the group has a limited buffer to take on additional debt at the current rating.

MGM Resorts International relies less on cash flows from Macau than other U.S.-based operators. That said, we expect good revenue and EBITDA growth at its MGM China subsidiary. Continued improvements in MGM Cotai's operating performance as it ramps up and opens new amenities, supported by good mass-market gaming revenue growth, should more than offset modest weakness at MGM Macau from a difficult VIP gaming revenue environment. We forecast EBITDA will increase 27%-30% as consolidated margins improve from the ramp-up at MGM Cotai and a continuing shift in cash flow to mass-market revenue, which is more profitable. After a period of heightened development spending, MGM should increase cash flows and lower capital spending needs, which will support leverage improvement through 2020.

Table 3

S&P Global Ratings-Rated Entities
Company Rating/Outlook

Genting Berhad


Las Vegas Sands Corp.


Melco Resorts (Macau) Ltd.


MGM China Holdings Ltd.


MGM Resorts International


NagaCorp Ltd.


Sands China Ltd.


Studio City Co. Ltd.


Wynn Macau Ltd.


Wynn Resorts Ltd.


Related Research

  • Wynn Resorts Ltd. Upgraded To 'BB' On Regulatory Resolution, Good Leverage Cushion; Outlook Stable - May 14, 2019
  • MGM China Holdings Ltd., A Majority-Owned Subsidiary Of MGM Resorts International, Assigned 'BB-' Rating; Notes Rated - April 30, 2019
  • Genting Bhd., Resorts World Las Vegas Ratings Affirmed With Stable Outlook; Higher Investment Exhausts Headroom - April 12, 2019
  • Las Vegas Sands Corp. Has Sufficient Financial Flexibility For Planned Marina Bay Sands Expansion - April 3, 2019

This report does not constitute a rating action.

Primary Credit Analysts:Sandy Lim, CFA, Hong Kong (852) 2533-3578;
Melissa A Long, New York (1) 212-438-3886;
Secondary Contacts:Harshada Patwardhan, Singapore + 65 6597 6152;
Sophie Lin, Hong Kong (852) 2533-3544;

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