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A life on the ocean wave

As Genting Hong Kong Limited seeks to expand its cruise businesses in North Asia, a Bernstein report indicates that if certain basic issues of the Chinese cruise market are resolved the industry would be ‘well-positioned’ to profit from the expected increase of Chinese outbound travellers in the next decade

Genting Hong Kong has proposed the delisting of its shares from the Singapore Exchange Securities Trading Limited in order to focus its efforts and resources upon its core business activities relating to the operation of cruise ships in Asia, especially North Asia, a filing with the Hong Kong Stock Exchange revealed yesterday.
The company – a subsidiary of the Malaysian based Genting Group – is primarily engaged in cruise and cruise-related operations together with leisure, entertainment and hospitality services.
Besides being listed in Hong Kong, Getting Hong Kong has a secondary listing in Singapore, informing in the filing that the decision to remove it was made in order to attract North Asian investors and to ‘eliminate the additional administrative overhead and costs of compliance’ with the Singapore Stock Exchange requirements.
Through its affiliate Genting Cruise Lines the company currently operates Star Cruises, Crystal Cruises and luxury cruise line Dream Cruises, with the company’s revenues from cruise and cruise related activities increasing 22.7 per cent to reach US$471.21 million (MOP3.79 billion) in the first half of this year, according to the company’s interim report.
In September, Genting Hong Kong announced Dream Cruises’ second vessel would start operations in November, taking guests from Hong Kong and Nansha, Guangdong to destinations such as Boracay and Manila in the Philippines and Ho Chi Minh City and Nha Trang in Vietnam.
At the time, the President of Genting Cruise Lines, Kent Zhu, stated the new vessel was expanding the company’s capacity and strengthening its ‘market leadership’ in the region.
Last year, the company placed an order for ten ships with the Lloyd Werft Group, comprising two mega cruise ships for Star Cruises and eight vessels for Crystal Cruises, with the two larger vessels to be delivered in 2019 and 2020.

A large and growing market
A recent report by brokerage firm Sanford C. Bernstein indicated that in 2016 a total of 2.1 million Chinese went on cruises, making it the second largest cruise market in the world after the U.S., but with outbound travel – excluding trips to Macau and Hong Kong – only representing 3 per cent of the total amount.
The report considered that with outbound travel from China over the next decade expected to reach 260 million by 2025, the cruise industry will be ‘particularly well positioned to benefit’ from this increase.
This future potential was anchored by the fact that cruise lines offerings were in line with Chinese customer demands, offering transportation, attractions, food, shopping and – ‘not insignificantly’ – gambling.
According to a South China Morning Post article published yesterday, an internal report on the Hong Kong casino ship business – vessels with gaming areas that operate in marine areas outside of Hong Kong jurisdiction – shows the total revenue of cruise ships operating outside of the city waters generated around HK$2.2 billion in 2014.
The aforementioned report also indicates these cruise operators do not pay any duties to the ‘Hong Kong Government or any government’; should they be required to, the amount to be paid by the sector could reach HK$984 million.

Solving the basics
The Bernstein report noted, however, that it expected cruise lines to actually reduce their supply in the territory in 2018, due to lower yields when compared to other world regions and that in order to fully explore the potential of the cruise market certain ‘fundamentals’ needed to be resolved.
‘Unlike other parts of the world, cruises in China are sold primarily via charter, which causes incentives between agents and operators to become misaligned. As a result, pricing discipline has been eroded and the market has devolved to one where close-in discounts are rampant. We believe cruise lines need to take back control of pricing and find a way to lengthen the booking curve in order to stabilise pricing and yields in the market,’ the report stated.
Resolving this issue, together with the development of new homeport infrastructure in South China Tier 2 and Tier 3 cities and diverting airline customers to take outbound cruises instead, would be the key factors enabling the development of the cruise market in China, Bernstein analysts believe.