Increased Discretionary Spending Could Boost Macau’s Growth

Tuesday, October 10th, 2017 | Written by April Bergman
Increased Discretionary Spending Could Boost Macau’s Growth

The Sanford C Bernstein and Company brokerage firm released a study recently about the likely trends in Chinese discretionary spending over the next 10 years. GGRAsia cited the Bernstein report as a evidence that mass market tourism (“high-intensity premium consumers”) could increase by a factor of seven.

The report noted that the number of Chinese mainland residents who make $3,794 a month or more should increase 22%-a-year over the next decade or so. Currently, 4.7 million Chinese make that sum each month, but that number will increase to 16 million people in five years.

Ten years from now, over 35 million Chinese residents should be making $3,794 a month. If that proves true, then the number of Chinese tourists with discretionary income to spend in Macau could increase more than 7 times over the next 10 years.

High-Intensity Premium Consumers

The Bernstein report suggests the mass market expenditures in Macau could increase by a factor of seven. In particular, spending on non-gaming entertainment in Macau should increase significantly. The “high-intensity premium consumers” are more likely to spend on non-gaming leisure activities, including shows, exhibitions, sporting events, bars, clubs, restaurants, and retail shopping.

Macau’s Government Tourism Office cited a 15-year plan to increase the non-gaming revenues of the city, following the advice given by President Xi Jinping in December 2014 to diversify the city’s economy. In the year’s since, casino developers build multi-billion dollar integrated casino-resorts on the Cotai Strip.

Macau’s Integrated Casino Resorts

Gambling gets a lot of the attention when people discuss integrated resorts, but the “integrated” part of the equation is seen as important by the developers — and Macau officials. The idea is not unlike what has happened on the Las Vegas Strip over the past 15 years. In 2017, 60% of the revenues on the Las Vegas Strip come from non-gaming revenues. Instead, the nightclubs, restaurants, retail stores, and famous shows generate tremendous revenue for the resorts.

Whether in Las Vegas or Macau, those non-gaming revenues diversify the revenue stream for casino operators and the cities which host them. Like a stock portfolio, the more streams of revenue a casino operation has, the less vulnerable it is to economic downturns or other “luck” factors. In China, non-gaming revenues represent a chance to avoid government crackdowns on gambling, whether from Beijing or Macau officials.

Chinese VIP High Rollers

Macau casino executives have had to adapt after the 2014 corruption crackdown. At a time, it was unthinkable that Las Vegas Sands, Galaxy Entertainment, or Melco Resorts would have to do anything besides build more casinos. Melco’s Lawrence Ho famously said in 2015 that non-gaming revenues never would be a major factor in Macau, because Chinese gamblers did not think in terms of tourist sites.

Lawrence Ho was talking about Chinese high rollers, though. For nearly 10 years, it was the VIP high rollers and the junket operators which brought them to Macau which the city’s casino owners sought. The high rollers pushed Macau’s gaming revenues to $44 billion in its peak year of 2013 — about 7 times that of Las Vegas that same year. Those VIP gamblers were the ones targeted in Xi Jinping’s crackdown, though, forcing Macau’s executives to adjust.

Premium Spend Rates

The Sanford C Bernstein firm touched on that subject in its report, as it mentioned the Xi’s anti-corruption crackdown had not abated in recent months. In fact, the crackdown has “escalated significantly in recent months”, a factor which could have “implications on premium spend” across all sectors of Macau’s gaming industry. The report noted that the VIP sector would be affected.

In other words, the short term forecast for Macau’s casino industry remains cloudy, even if the long term outlook looks quite promising. Over the past year, Macau’s casino industry began to increase month-to-month and year-to-year, as the impact of multi-billion resorts like Wynn Palace, Parisian Macau, and Studio City continued to have an impact. A newly intensified crackdown could spoil all that in the short run, though.

Long Term Macau Casino Growth?

The picture could become much brighter in the coming years, so investors should be bullish on Macau casino stocks over the long term. The man who succeeds Xi Jinping might not have the same fervor for an anti-corruption crackdown; in fact, successors often reverse the policies of their predecessors, or at least review them. It is a matter of showing one’s individuality or leadership.

GGRAsia is looking for answers to the five-year Communist Party congress which begins on October 18. Coming into his second 5-year term as Chinese president, Xi Jinping is expected to solidify his position as the most powerful leader in China since Mao Zedong himself.

19th Chinese National Congress

Five of seven of the politburo’s powerful standing committee seats are on the line. So are 11 of 25 wider politburo seats, as well as about half of the 205-member central committee positions. The 64-year old Xi will have tremendous ability to place his allies in those positions, allowing himself to cement his top role.

This should be the pinnacle of Xi Jinping’s power. Xi would face age limits that forced the retirement of his predecessors if he ever sought a third term, because no one over 68 is allowed to stand for top positions. If all goes according to tradition, the next 5 years could prove troublesome at times for Macau’s casino industry. Beyond that point, Macau’s potential for growth could be much greater.