The chips are down

Odds stacked against Asia's casino industry as revenues decline, but optimism remains

It's a Monday afternoon and about half the tables at The Venetian Macao have a few lackluster players betting without much enthusiasm. The long-time destination for gambling aficionados is seeing the coldest and possibly the longest winter in its history.

Net revenue declined 28.4 percent year-on-year to $739.5 million at Asia's premier hotel and casino resort in the second quarter of this year, due to a 31.7 percent decline in casino revenues.

Studio City casino in Macao opened on Oct 27 to much fanfare. AFP

The dismal performance at The Venetian is one example among many casinos in the former Portuguese enclave, and an accurate reflection of how the Asian gambling industry is faring this year.

Operating profits at MGM Macau dropped by more than 47 percent in the third quarter of this year. Profits of Genting Singapore, owned by Malaysia's Genting Group, fell 81 percent in the third quarter of this year. Melco Crown Philippines Resorts lost 45 percent more money in the first nine months of this year than in the same period last year.

And yet, despite the weak performances over the last year, investors and analysts expect gambling industry revenues across Asia to double by the end of the decade and the number of casinos to multiply.

The optimism is visible just down the street from The Venetian, where the massive Studio City opened with much fanfare on Oct 27.

The new integrated entertainment resort, run by Melco Crown Entertainment, boasts a giant figure-eight-shaped Ferris wheel, an amusement park and 1,600 rooms and suites. Just 5 percent of the new resort is dedicated to gambling.

Last year was supposed to be one of "death by a thousand cuts" for the industry, and the troubles continued well into 2015 as hotel occupancy rates fell, shopping slowed down and gambling revenue dropped.

This year, Macao's gambling revenue hit its lowest level in five years - down 33 percent in September from a year earlier to $2.3 billion. Gambling revenues declined every month for 16 months to September.

The slump has been exacerbated by Beijing's clampdown on graft and the cooling of the economy in the Chinese mainland, which further pushed down earnings for the gambling mecca.

Policies have acted as headwinds to growth, scaring off high-end gamblers who account for two-thirds of the industry's revenue.

"The anti-graft crusade on the Chinese mainland is one of the main drivers," says Ben Lee, managing director of IGamiX, a Macao-based gambling consultancy.

"Fewer VIP players have come to Macao since last year."

President Xi Jinping's relentless anti-corruption campaign has rolled out across the country since the start of his presidency in 2013, targeting the flight of illicit capital. His policies are also rippling into neighboring countries.

Earlier this year, Xi warned foreign casinos that Chinese citizens will be gambling much less in China and abroad.

"Some countries see our nation as an enormous market, and we have investigated a series of cases," Hua Jingfeng, deputy bureau chief at the Ministry of Public Security, said during a February news conference.

Among the regional gambling destinations most affected by the sudden shyness of the Chinese gambler is Singapore.

The city-state opened two casinos in Resorts World Sentosa and Marina Bay Sands in 2010 and they have proven to be very successful.

The former is operated by Genting Singapore and the latter by Las Vegas Sands, one of the largest casino companies in the United States, run by tycoon Sheldon Adelson.

But like every other gambling destination in the region, the city-state is also facing headwinds.

"Singapore has also suffered from fewer traveling gamblers, especially VIP players, flying from the Chinese mainland," says Aaron Fischer, gambling industry and consumer analyst at brokerage and investment group CLSA.

"Singapore has the highest exposure to China's high rollers."

Genting Singapore recently reported net profit for the third quarter of S$66.91 million ($47.3 million), down 47 percent year on year.

For its part, Fitch Ratings expects that gross gambling revenue at Genting Singapore could be flat or even contract for the whole year.

Casino revenues at Marina Bay Sands fell 7 percent to $632 million for the first quarter, while occupancy at the hotel fell 4.5 percent from a year ago.

A weaker currency also cast a shadow on Singapore's gaming industry. The Singapore dollar is losing ground to the Hong Kong dollar, which is kept as working capital to settle with winning VIP players.

As well as the Singapore dollar working against the city-state's gambling sector, the depreciation of other currencies in the Association of Southeast Asian Nations also translates into fewer visitors from neighboring countries like Malaysia and Indonesia - large sources of both traditional and high-end players for Singapore - according to a recent note by banking group CIMB.

Gambling destinations in Malaysia and the Philippines are also suffering, but their reliance on mass-market players and the weakness of local currencies could be working in their favor.

Malaysia has one casino, Resorts World Genting, which is operated by Genting Malaysia. Gambling revenue was up 4 percent year-on-year to 1.98 billion ringgit ($451 million) in the second quarter of this year.

The company benefited from higher volumes of business, which made up for lower revenues among premium players. The performance was something of a turnaround. Revenues in the second quarter of last year actually dropped 14 percent as VIP players vanished.

Meanwhile in the Philippines, gambling revenue across the country's casinos in the first half of the year rose 16 percent to around $1.4 billion, according to the Philippine Amusement and Gaming Corp, the regulator, in July.

However, high-end gamblers from China have been visibly missing. Any increases are coming from other places, such as South Korea.

"Malaysia and the Philippines see a mix-up of players from other Asian countries, for example, mainland China, as well as foreign markets outside," says Lee of IGamiX.

However, there is reason to expect gambling revenues to rebound relatively quickly. Tourism, for instance, is holding out some hope for the industry.

Asia's tourism sector has been flying high since the financial crisis in 2008 and 2009, with gambling one of the main attractions.

The Asia-Pacific now accounts for more than 23 percent of global international tourism.

Last year, the region recorded 263 million international tourist arrivals, up 5 percent. This year the growth is likely to remain at between 4 and 5 percent, according to the United Nations World Tourism Organization. China remains the largest outbound tourism market in Asia.

According to China Outbound Tourism Research Institute, other countries in Asia received more than 90 million Chinese visitors in 2014, a marked rise from a year earlier.

The challenge stems from many Chinese travelers cutting back on their overseas spending as their priorities shift.

The recent depreciation of the yuan has increased costs for travelers from the mainland, adding to the gambling industry's gloom, according to a recent note by Daiwa, a Japanese investment bank.

"It threatens to eat into the appetite for gaming," the bank said.

At the same time, tourists from China are spending less time in casinos during their overseas trips.

"For what we call the 'second wave' of Chinese outbound travelers - younger, well-educated, affluent persons with travel experience - gambling is less important," says Wolfgang Georg Arlt, director of China Outbound Tourism Research Institute.

"They are rather interested in authentic experiences and new destinations. So with the growing importance of that new generation of travelers, the percentage of gamblers is getting smaller."

Yet, despite the pressure from campaigns in China and other countries, as well as the currency woes hitting various countries in the region, Asian tourists remain avid gamblers.

The industry is now banking on a rising population and higher disposable incomes in the region to sustain growth.

CLSA expects Asia's gambling industry earnings before tax to double from $9.5 billion to $18.7 billion between 2015 and 2020.

"The growing population, especially the large middle class and a continuing increasing income level, will be the main drivers," says Fischer of CLSA.

This, in turn, is attracting casino developers.

Seventeen committed projects, including the newly opened Studio City in Macao, are set to open in the region before 2020, according to CLSA. The number of casinos in Asia is expected to increase by 30 to 230 over the next five years, the group says.

"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," CLSA said in a report.

For China Daily

(China Daily Africa Weekly 11/27/2015 page22)