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Wellington Daily News - Wellington, KS
  • We're Starting To See What Macau's 'Lehman Moment' Did To Its Gaming Industry

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  • Business Insider
    This spring a $1.3 billion heist rocked Macau's VIP gambling world, and now we're seeing how that impacted the massive casinos that operate there.
    The short story is that it hasn't been great.
    According to Morgan Stanley, VIP revenue dropped 2% in May and 17% in June. That's the first time that revenue has slowed since 2012.
    What the heist did was disrupt the normal operations of the junket system. When it's working smoothly, China's real high-rollers head to Macau's VIP rooms to bet big. Those rooms are operated by junkets (the junkets can also be called VIP junket operators or VIP room promoters).
    The gamblers get treated like royalty, and the junkets make money from their games. Win or lose, the junkets take a cut of every wager placed in a game. That's called "rolling chip volume."
    In this model, investors in these junkets make 1% to 2% "guaranteed returns". When the heist happened, investors got skittish and started pulling their money or demanding a higher return.
    It was $1.4 billion, after all.
    In the table below (from Morgan Stanley), you'll see that numbers were down across the board in Q2 2014.
    In terms of VIP revenue Sands China and Wynn Macau were hit the hardest seeing 23% and 22% declines respectively.
    Mass revenue declined everywhere except for Wynn Macau and MGM China.
    Last month, when we talked to Macau investor Jason Ader, founder of hedge fund SpringOwl Asset Management, he told us that this event could be Macau's Lehman Moment — the moment everyone in the business realizes that it's going to have to shift gears.
    That shift, he explained, would be away from VIP high rollers and toward retail gamers.
    And indeed, despite that fact that Sands China was the casino that took the hardest VIP revenue hit, Morgan Stanley still thinks it's positioned to win the Macau game. Why? Because it's best positioned in "mass market" gaming.
    From the report:

    The least susceptible to VIP slowdown vs. peers as Sands China has 70% of EBITDA from mass market or 80% including non-gaming; (B) Dragon Palace opened in May,and smoking could be allowed in that area as it is fully enclosed, would ramp up and boost 2H14 mass market outperformance. In addition, the company is capable of further increasing the share of complementary hotel rooms from current 20-30%. Cotai Central sourced 50 new premium mass tables, 20 from mass and 30 from VIP ; (C) LVS focuses on capital return/dividend payment, which could get reflected in Sands China in future in terms of special dividend /capital return too.

    Page 2 of 2 - There are other bright spots that analysts believe could bring more people to Macau in Q3 — the end of the World Cup (which lead Chinese sports lottery sales to grown 83%,) improving Chinese data (if you buy those numbers) and loosening Chinese monetary policy (a double edged sword).
    None of this, however, means that Macau's transition from a place of VIP high-rollers won't be to families that want to see shows and play baccarat won't be difficult.
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