The last time Macau’s casino operators completed a fifth of their concession license was in 2005. Back then, the city’s gross gaming revenue (GGR) reached $6 billion, about half of what was played out across Nevada’s slot machines and card tables. But as Asia’s gaming hub matured, Macau quickly overshadowed its US counterpart, topping $37 billion by 2019, quadrupling Nevada's figures.
With Macau’s casino operators approaching the same point in their current concession, they once again are looking to Las Vegas and hoping to emulate Sin City’s transformation away from its gambling identity and into one featuring world class integrated resorts known for tourism and leisure. So far, arrival numbers appear promising.
Almost nine million tourists have entered Macau in the first quarter of 2024, up 79% from a year earlier. Officials are targeting 33 million visitors for the year, representing just below what neighbouring Hong Kong achieved in 2023.
“There’s room for those numbers to go even higher,” said Mary Mendoza, managing director of The Platinum, a gaming and hospitality consulting firm affiliated with C3 Gaming Group in Las Vegas, to FinanceAsia. “It is important to build on the momentum,” she said.
Mendoza highlighted favourable tourism policies from Beijing, including the expansion of China’s facilitated individual travel (FIT) scheme, an arrangement allowing eligible mainland visitors to spend up to seven days in the Special Administrative Regions (SARs) of Macau and Hong Kong every three months, to help further.
“Macau is truly a one-of-a-kind place, all within a short flight from most provincial capitals in China,” Mendoza said, noting other cultural draws like century old European architecture and authentic Portuguese cuisine offering additional activities outside the casino properties, underscoring the intangible attractions such as Macau’s gastronomy scene.
An industry makeover and valuation reset
Investing into those non-gaming businesses offer several benefits for Macau, explained Angela Han Lee, senior analyst at Apac gaming and hospitality at Bloomberg Intelligence, who spoke to FA earlier this year. It is not only about diversifying the economy, she said, but also removing cyclicality from it, making the industry more defensive and predictable, Han Lee said at the time.
While Macau’s casinos have made previous attempts to bolster non-gaming revenues, the faster profitability growth of the gaming businesses has often proven a disincentive to any meaningful push. But under an administration prioritising non-gaming industries, the pressure is building for the operators to permanently buck the trend, as the current gaming concession spans just 10 years, half of the previous 20-year concession length.
Attracted by the market’s potential and its links to the Greater Bay Area’s (GBA) 90 million people, the desire to remain in Macau was underscored during the lengthy renewal process in 2022 when seven applicants applied for six licenses. That competition resulted in all six incumbents pledging an aggregate $15 billion over the life of the current decade-long concession, with much of that money promised into non-gaming operations to better ensure their operational longevity. The licenses were renewed, with challenger Genting Malaysia missing out.
In addition to the challenges of Covid-19, these funding commitments coincided with a shift in customer focus for the casino operators, which had previously relied on the junket sponsored, high-end VIP players that had historically driven revenues, and instead now switched towards mass-market gamers. Though the customer pivot is margin accretive since junker players require commission fees, the GGR accrued is significantly less, requiring a considerably higher volume of mass-market players to compensate for the change.
Investors have responded to that evolution. Back in 2014, Macau casino stocks traded with a mid-teen EBITDA multiple when the GGR was climbing towards $45 billion, but the sector derated to mid-single digits after China’s anti-corruption campaign and economic slowdown weighed on earnings. Stocks stabilised by 2018 when evidence of mass GGR surpassing the VIP category materialised.
With mass-gaming now the biggest GGR contributor, questions about the capability to shift customer focus appear unwarranted. Total GGR for Macau reached $10 billion for the first four months of 2024, about 80% of pre-pandemic levels. While the government forecasts a GGR of $27 billion for the year, CLSA upgraded the outlook to $30 billion, though lowered EBITDA margins between 1% and 3% reflect increased competition as casinos fight for patrons to enter their properties.
Dividends matter
Amid the sector’s transformation, casino stocks committed dividends to attract investors, later suspending them during the pandemic, in order to preserve cash. Even after borders reopened and players returned to the gaming floor, few analysts believed any payments would soon resume given the very public declaration of aggressive non-gaming commitments.
But by February, operators surprised the market, unexpectedly announcing plans to return cash to shareholders. Galaxy led the charge, paying a special dividend of HK$0.30 per share while MGM and Wynn gave HK$0.24 and HK$0.08 per share respectively. Investors have rewarded Macau’s casino operators for their generosity since the start of the year, driving the sector’s performance above the Hang Seng Index, the Hong Kong bourse on which they trade.
Dividends are powerful pulls for investors. Money managers are placing higher premiums on stocks maximising shareholder returns through dividend payments and share buybacks, Christopher Wood, equity strategist at Jefferies, wrote in a note to clients. Despite underperforming world indices, dividend stocks have struck the right chord for Chinese investors, with the CSI 300 Dividend Index outperforming its non-dividend counterpart by a third on a total return basis since late January 2023, noted Wood, flagging the potential for Chinese stocks to increase payouts further.
Simultaneously investing and paying dividends reflects positive sentiment for both Macau and the casino industry. However, without a corresponding lift in operating cash flows, any funding tension falls onto the company’s balance sheet, pushing leverage rates higher and leaving its liquidity susceptible to financial expenses.
Credit markets are providing some reprieve for the moment, as easing interest rate expectations lower debt servicing and capital costs for the operators. Just days after Fitch Ratings downgraded its outlook on China’s debt, the agency noted that Macau’s “sustained economic diversification away from the gaming industry” could lead to “positive rating action or upgrade” to its sovereign grade. The credit agency later affirmed Macau’s long-term issuer default rating at AA, with a “stable” outlook.
Macau’s greater role
Macau’s economic diversification is not only a priority for the local government, but for Beijing as well, commented Tim Simpson, an associate professor at the University of Macau and author of Betting on Macau, to FA.
Since the 1999 handover, Macau has served as a policy laboratory to incubate a new type of Chinese tourist, one equipped with greater mobility and better purchasing power, Simpson explained, adding that SARs like Macau are producing Chinese consumers that not only support Beijing’s ambitions to drive the domestic economy, but serve as prototypes that can multiply across the GBA.
Exemplifying London’s Crystal Palace, a mid-19th century exhibition hall which marked the emergence of consumer capitalism, Simpson said that “although its walls are not made of glass, Macau’s Venetian Resort is the Crystal Palace of our own age, and its spectacular gambling, cosmetic, and luxury retail attractions help transform Chinese tourists into consumer citizens [that sustain the economy].”
Simpson added that “as visitors ventured inside the [Crystal Palace’s] glass structure where consumers could see, touch, and purchase products from over 14,000 exhibitors from around the world, China’s modern consumer is repeating that today in unison with Macau’s integrated resorts.”
The inside innovations
That consumer transformation is embedded into Macau’s future landscape, where non-gaming activities are expected to account for 60% of the city’s GDP by 2028, according to government plans.
Though gaming expenditure is expected to make way for non-gaming investing, there is a sense of irony in the spending shifts, remarked Andrew Pearson, founder and managing director of Intelligencia Limited, a consultancy specialising in fintech and artificial intelligence (AI) and author of The Dead Chip Syndicate, a Macau based thriller.
“While gambling or games of chance may date back centuries, modern gaming investments are more than just slot machines and card tables, but innovative technologies employing generative AI, machine learning, and natural language processing, all used to enhance operational efficiency,” Pearson explained to FA.
With facial recognition and generative AI already running inside the integrated resorts, Pearson pointed to the rollout of new smart-gaming tables employing RFID (radio frequency identification), capable of analysing a player’s profile and game conditions to produce data and adjust exotic bets in both real time and in a cost-efficient manner.
The subsequent information produced is invaluable. While RFID can detect counterfeit chips or mitigate dealer errors, the technology can expedite gameplay and drive organic GGR growth. Even more valuable, RFID identifies foreign gamblers, enabling the casino to secure the 5% tax rebate on the GGR they play under the new concession.
However, while technological innovation blossoms inside a casino hall, Macau must manage the reality of its other constraints. To accommodate Macau’s mass-market players, operators are focusing on a slew of hotel offerings, retail shops, and family entertainment venues – such as water and amusement parks, which may come at the expense of the gaming area.
Outside properties, volume restrictions have also become visible, especially when influxes of large crowds can quickly strain Macau’s 30 square kilometres, roughly half the size of New York’s borough of Manhattan. In January, fans leaving a K-Pop concert by boyband Seventeen overwhelmed the nearby residential neighbourhoods, causing unavoidable inconveniences.
Better coordination between the casino operators and the local businesses would be a win-win for Macau, commented restaurant owner Asai Cheong, co-founder of Portuguese Restaurants & Retail Concepts (PRRC) which runs Albergue 1601 in the city’s historic St. Lazarus district. Cheong noted that campaigns, like the one aiming to spread tourists throughout the city rather than cramping popular areas, is a good first step that can be built on.
It is a sentiment echoed throughout Macau’s business leaders. “Evolving Macau into a world tourism hub is a learning process,” noted Lai Chong Au, Group CEO of Delta Asia Financial Group in Macau, speaking to FA. “It is about finding the right balance, ensuring that visitors feel welcomed without sacrificing the well-being of Macau citizens,” Au explained, adding the initiatives are directionally positive, but not always a straight line.
Licensed operators are aware that reaching that balancing act needs to occur sooner than later. In addition to the shorter concession, under the new agreement, assessments of the casino operators are held every three years and reviewed by the Macau government, with that first discussion just months away. Based on the amount of new money committed, none are hoping for any bad reports this early.
For the industry, 2028 becomes a watershed moment, marking when the government expects Macau’s GGR to return to 2019’s pre-pandemic levels.
Fewer than three years into the new concession, the casino operators are feeling the pressure to deliver results welcomed by both shareholders and policymakers. In the meantime, balance sheets are expected to absorb most of that pressure.
This article first appeared in FinanceAsia's print publication -- Volume Two 2024.
