Doubling down

AFTER years of spectacular growth that propelled Macau past Las Vegas to become the gambling capital of the world, the territory has hit a rough patch. So you might expect that the gathering of the casino industry’s leaders that took place there this week would be dominated by talk of retrenchment. Instead, the tycoons boasted of their grand plans for expansion.

Fat-cats from the Chinese mainland, where gambling remains illegal, used to be Macau’s mainstay. But as the Communist Party’s leaders have cracked down on corruption over the past two years, and as rival casinos in Australia, the Philippines and elsewhere have begun to draw big-spending gamblers away, the flood of high-rollers into Macau has slowed to a trickle. Its gambling revenues have plunged from nearly $13 billion in the first quarter of 2014 to under $8 billion in the first three months of 2015 (see chart). Shares in its gambling firms have fallen by half since the start of 2014, wiping more than $90 billion off their combined market value.

Undeterred, they intend to open new casinos and hotels in Macau costing more than $20 billion over the next few years. This would double their invested capital base, calculates Aaron Fischer of CLSA, a stockbroker. The casino chiefs are not taking as reckless a gamble as it may seem. To attract high-spending VIPs, they have had to rely on the help of “junket” operators—shadowy, independent middlemen who typically take a 30% cut of any revenues. The pampering such VIPs expect—being ferried around in private jets and limos, and attending lavish banquets—also eats into the casinos’ profits. As a result, the casinos’ margins on VIPs are a mere 10% of revenues; on mass-market customers, they are 40%.

So the reason to think Macau still has a bright future lies in the insatiable desire among ordinary Chinese people to emulate the country’s elite, and go on gambling trips; and on the rising numbers with the wherewithal to do so. The expansion now under way has been undertaken at the insistence of Macau’s government, which is keen to turn it into a bigger and more family-friendly destination for China’s expanding “mass affluent”. The government is engaging in various public works to help attract more tourists, including a bridge linking Macau to Hong Kong airport. CLSA thinks that in 2017 the Macau casinos’ revenues from VIPs will have fallen to $22 billion, from the peak of $30 billion they hit in 2013, whereas revenues from the mass market will have risen to $17 billion, up from $14 billion. The low-rollers will provide an ever-greater share of the takings thereafter.

Mr Fischer thinks the casino firms will have a few more relatively lean years before they complete the switch from pampering the Chinese elite to serving the middle-class masses. But only relatively: Macau’s casino operators still raked in $1.5 billion of combined EBITDA (earnings before interest, tax, depreciation and amortisation) in the first quarter of this year. That is down from $2.6 billion in the first quarter last year but still a 20% EBITDA margin. Meanwhile, construction work on new leisure facilities and infrastructure continues apace. “Build it and they will come” seems to be the Macanese motto.