By: Kelsey Wilhelm
Ups and downs and a comeback – so, what is sustainable for VIP gaming?
Vitaly Umansky – For VIP, the biggest question is how much and how fast it can grow. In the long run the VIP market is a growth market. I don’t believe it grows as fast as mass, so I think we will continue to see a diversification away from VIP towards mass market, the way that we’ve seen for the past six, seven years. But VIP is definitely an element of gaming in Asia, gaming in Macau, and it’s not going to go away.
Trying to forecast VIP is not a task that can be achieved.
Everyone got VIP wrong in 2013, everyone got VIP wrong in 2009, everyone got VIP wrong in 2016. Not just the gaming analysts and investors, but the gaming operators, the junkets. And the reason why is that there’re so many moving parts with respect to VIP that it’s very difficult to forecast over a more moderate time period.
In the end, I think, it’s a viable business model and I don’t think it’s going away. But to say it’s going to grow at 20 per cent next year, 15 per cent the following year, and 5 per cent the following year is almost a fool’s errand.
How much VIP are we losing to the Philippines?
V.U. – It’s always a question of is there cannibalisation when new markets open up. Definitely there is. There are some players who would be considered Macau customers that have options to go elsewhere – whether it’s the Philippines, Korea, Singapore . . .
In reality, when new properties open up elsewhere some players do go to try out those properties. Many of those players wind up going only once. They don’t like the experience relative to what they get in Macau.
The big competitive advantage that Macau has is scale and proximity and I would say Chinese-ness. Being a Chinese city within China, having the amenities that Chinese customers are looking for – especially the high net worth individual ones – that’s very difficult to replicate elsewhere. So, you will get some business that leaks out to other jurisdictions but in the end I don’t think it’s terribly material.
Smoking ban: we’ll all get used to it
Have we already seen the worst of the impacts of the smoking ban?
V.U. – I think with smoking you have an immediate impact, to some extent, as players and casinos have to adjust to a new norm. So, we saw that when the last big smoking ban came [into effect in] Macau in October 2014. Part of the problem back then was that operators were caught a little bit off guard in terms of what they could and couldn’t do as last minute changes were made to the regulations.
With the smoking ban that’s upcoming for January 2019 there’s a long lead time for the operators to get ready. All of the new properties that have opened since 2015 are already fully non-smoking, anyway, so it’s just a little bit of reorientation of the actual players.
There will be some headwind created from the elimination of smoking in VIP and certain premium mass areas. It’ll be a headwind, not a deathblow. It’s not something that will in the long run structurally impact the market. As we saw with the mass market after October 2014 – or the portion of it that became non-smoking – there was an impact but it corrected after six months or after 12 months. And if you look at other gaming jurisdictions where they’ve gone through smoking bans we’ve seen a similar impact.
The big difference with Macau is there really is nowhere else to go. If you’re a Chinese customer in Guangdong, if you’re a Chinese customer in Hong Kong and you’re a day-tripper, you’re still coming to Macau whether they have smoking [or not].
If you’re a destination customer, you could fly to a jurisdiction that has smoking – but that’s really not your primary criteria.
What kind of impact do you envision new openings on the Cotai Strip having?
V.U. – I’m a big believer – and I’ve written about this for several years – that basically gaming in a market that is not fully saturated is largely dependent upon supply expansion. You build it and they will come. That is really what we’ve seen in Macau.
We went through a bit of a dislocation in late 2014/2015, that had macroeconomic and kind of political risk scenarios tied around it that led to that downturn. It wasn’t because we built more properties and people cannibalised themselves.
In the end, what we’ve seen happening for the past 18 months is growth. In mass market largely tied, in my view, to the expansion of Macau – building more hotel rooms, building more high quality product, allowing customers to experience newer and better things. That’s what Macau really needs to continue doing.
I’m pretty optimistic that as we continue to build out new properties – whether it’s Galaxy building out Phase III, MGM Cotai [this month], SJM [Lisboa Palace] in 2019 – these are all helpful for the market.
Speaking of the re-tender of the concessions – will they get pushed back to 2022?
V.U. – You’re correct in saying it’s a re-bidding process, or a bidding process: it is not an automatic renewal. That has always been the case. I think there’s been a lot of misconception about what that really means.
In terms of timing, it’s hard to say. We have two operators whose concessions expire in 2020 – SJM and MGM. We have four other operators with concessions expiring in 2022.
The nuance around all this is that the current Administration in Macau has its term ending in December 2019. The real question is going to be: ‘Does Macau, does China want the current Administration to come up with a plan for the next 10 to 20 years for Macau’s gaming industry, or do they want to leave it for the next Administration, that will have a five to 10-year Administration?’
Is there space in Macau for another operator?
V.U. – There’s always space to have more operators come in. If you look at Cotai, there’s plenty of land available for more integrated resort development, and whether one of the existing operators builds there or whether there’s a new concession holder that builds there, in the end for the market it might not matter that much who the actual party is.
The question the government needs to deal with is: ‘Do they need another operator? Do they need more competition?’ The answer to that is: probably not. From a pure kind of economic competitive environment six very strong, very good developers, very good operators, have done a very good job in Macau. I’m not sure you need to bring in a seventh party, or eighth party.
Suncity’s opening up in Vietnam. Will we see more junket operators moving into operating casinos?
V.U. – Today, the junket operators are incapable of running a casino. They don’t have the operational marketing expertise to run a real casino. They can run VIP rooms, from a marketing perspective, which is what they do. But they don’t really have the expertise to run a casino.
Suncity operates around Asia, as do some other junkets, largely as VIP operators or, effectively, VIP marketing agents. That is just one sliver of what it takes to run a casino. Operational aspects of running large-scale projects – with hotel operations, with non-gaming operations, with mass market operations – are completely different from what the junkets know and understand.
Now, they could also hire in that talent, the same way that some of the new operators in Macau were able to do over the past 10 years – hire in talent, have them on the properties. The Suncitys of the world can try to do that, that’s not their core strength. Suncity has been more active in expanding other jurisdictions via these VIP rooms rather than building new properties. Yes, they’re building a property in Vietnam but that’s pretty much their only big, large-scale investment outside of Macau. They’ve also bought a building in Macau where they might have a casino operation under a satellite deal. Again, it’s the same type of business they’ve already been running.
They’re not going to be competitors, from a purely gaming perspective, for established gaming operators and developers; they don’t have that expertise. And in the end they’re a marketing group, and that’s what they excel at, that’s where their strength is. They don’t necessarily need to get involved in a vertical integration to actually run a building. They can attempt to do so but that’s a very, very difficult thing to do.
Nuances between VIP and premium mass
Why would someone choose to go from VIP to premium mass or vice-versa?
V.U. – I think one of the big questions with respect to premium mass and VIP is: ‘Why does the high end of premium mass exist?’ First off, both VIP and premium mass are very broadly defined in terms of who the players are. You have many players both in VIP and in premium mass. A significant number of those players are lower-end VIP or premium mass players; they’re not the big whales that are coming and losing US$5 million or US$10 million on any given trip – those players are few and far between.
There’s a lot of low-end, high-net worth individuals who come in and lose US$15,000/US$20,000, US$30,000 or less and are still considered VIP or premium mass.
The big difference between VIP and premium mass when I talk about VIP is the junket-driven VIP which is 80/85 per cent of the business in Macau. That part of the business has two functions. It has a customer acquisition function: the junkets go out and source players, and it has a credit function, broadly defined – meaning the player needs to have the ability to have chips available for him to play in Macau. And with the capital controls that exist with China there are certain players who have no other ability to kind of move money from China into Macau in order to play. Their only avenue would be to go through a junket.
They know the junket, they know the junket agent – that’s where the important relationship lies – and they go with the junket agent to places like Macau or other jurisdictions. In exchange, the junket will often provide them with some form of credit, whether it’s real credit or whether it’s a cash advance that’s already backed by cash in China. And then they go into a VIP room: a Suncity room, a Tak Chun room, etc.
The premium mass player is, in general, different because they don’t rely on credit, meaning they already have cash available to them in Macau. And whether that comes from them utilising UnionPay transactions or whether it comes from them transferring money from existing non-Chinese banks – whether in Hong Kong or Macau or somewhere else – they already have the ability to be liquid in a casino.
So why does a player choose premium mass versus VIP? One: if you don’t need the credit, you may not be incentivised to work with a VIP agent. Because you don’t need the credit, you don’t want the credit. If you take credit from a junket there’s a lot more disclosure, the junket knows who you are, they know how much you’re betting, they’re monitoring what you do. They’re having that direct marketing relationship with you.
In a premium mass environment, your relationship is with the casino. The casino, because they view you as a valuable customer, treats you better than they treat other customers. So you’ll get a better room, you will get better service in a restaurant, you will get better service from the casino hosts.
So many players gravitate, from their own value perspective, to better service, better hotel rooms.
In VIP, although you may get a hotel room, you may get food and beverages, this actually comes out of your own pocket. In lieu of a rebate that you would effectively get as a player you’re being given a room that comes out of that rebate.
So in the end, conceptually, for many of these players when they look at the VIP environment they’re saying ‘Well, I’m not really getting a free room, it’s kind of coming out of my pocket anyway’.
So often you’ll have this shift from VIP into premium mass on one trip. Where a VIP player may wind up spending 70 per cent or 80 per cent of their budget with a junket and then spend 20/25 per cent of their budget with premium mass, with a premium mass host, and in exchange for that play they’re getting all the services that premium mass provides. So that’s where a large amount of the overlap exists.
Will the HKZM Bridge help?
V.U. – The bridge should help, if it’s structured properly to allow fly-in visitors to Macau, to effectively start using Hong Kong Airport as Macau’s airport . . . I think one of the big constraints for overnight visitation from destinations outside of Guangdong Province is airlift capacity. Flying into Hong Kong Airport today and making your way into Macau is a long and tedious and very frustrating process.
Having a bridge facility that allows you to get off the airplane, collect your bags, get on a coach, get in a car, drive to Macau in 25 minutes, go through Immigration and then wind up in your casino hotel room within maybe an hour and 15 minutes of landing is dramatically different from spending three hours, or two and a half hours, getting on trains, getting on ferries, going through multiple rounds of Immigration processing.
There are other infrastructure projects that are being developed all around Guangdong and Macau that will actually have better linkages between the airports in Guangzhou, for example, or down the road the airport in Zhuhai to Macau. That will dramatically help with the pure mass because it’s a much cheaper destination to fly into. That’s probably more than four or five years from now in terms of that really kicking off.