Markets & Finance

Vegas vs. Macau: Who Will Win?


From Standard & Poor's RatingsDirect

Las Vegas has been the long-time champ on the world gambling scene, but an up-and-coming player is elbowing its way to the table: Macau. The Special Administrative Region (SAR) of the People's Republic of China is currently one of the world's fastest growing gaming markets. It is estimated that during the next few years Macau will not only replace the Las Vegas Strip as the largest gaming market in the world in terms of revenue, but will also turn China into the world's second-largest global gaming jurisdiction, after the U.S.

Once controlled by Stanley Ho's Sociedad de Jogos de Macau, the Macau market is expanding due to favorable demographics and the entry of international gaming companies such as Wynn Resorts (WYNN

; S&P credit rating, B+), MGM Mirage (MGM

; BB), Las Vegas Sands (LVS

; BB-), Publishing and Broadcasting Ltd. (A-), and Galaxy Casino S.A. (B+), each of which is, or is planning on, constructing Las Vegas-style casinos costing billions of dollars. The expected significant development during the next several years will likely alter Macau's competitive environment.

Similarly, the Las Vegas Strip, long considered the industry's bellwether market, will also witness a significant building boom during the same period. How will each of these markets respond to significant expansion? Here Standard & Poor's Ratings Services evaluates Macau and the Las Vegas Strip in the context of several broad categories.

Visitor trends

Given the limited supply of casino-style gaming in the Far East, the liberalization of gaming in Macau in 2001 was an opportunity for the Chinese government to entice significant capital investment to the market with the hope of transforming the city into the entertainment capital of Asia. Macau's close proximity to China provides a base of potential gaming customers that is larger than anywhere else in the world. It is estimated that more than 100 million people reside within a three-hour drive, and more than 1 billion people within three hours' flying time from Macau.

During 2005, Mainland Chinese visitors to Macau numbered 10.5 million, nearly 60% of the total visitors, compared to about 4 million in 2002. Hong Kong is the second-largest feeder market to Macau, representing about 30% of visitors during 2005.

While per-day spending by visitors overall to Macau was down about 7% to $190 in 2005 compared with the prior year, visitors from Mainland China had the highest per-day spending at $282 (all figures are in U.S. dollars). In addition, these visitors had the longest average length of stay, at 1.4 days, compared with 1.2 days for the overall market. The expected greater population covered by the FIT -- a government program to relax travel restrictions -- as more cities and provinces are included (19 cities were added in late April, 2006); the steady rise of the middle class in China; and expected growth in the per-day spending of Chinese visitors, all put Macau in a good position for strong performance in the future.

Las Vegas also benefits from favorable demographics, which help consistently to drive capital investment and expansion of the market. On average, visitors to Las Vegas have not only stayed longer (3.5 nights in 2005 compared to 2.3 nights in 1970), but have also gradually increased their trip budget both for gaming and nongaming expenditures.

During the past six years, average gaming trip budgets have risen to $627 from $559, and nongaming trip budgets have jumped by more than 20%. In addition, the age of the average visitor has modestly declined, while the annual household income has increased. As in Macau, these favorable demographics are expected to continue over the intermediate term.

Revenue sources

Macau generated about $5.6 billion in gross "games of fortune" revenue during 2005, compared to about $3.5 billion during 2003. Given the favorable prospects, it is possible that Macau's gaming revenue could exceed $10 billion within the next five years. However the composition of gaming revenue is what makes Macau unlike any other gaming jurisdiction in the world, including the Las Vegas Strip.

Macau's rapid growth has been driven by gaming and is characterized by high-limit gamblers, both for slot machines and table games. However a significant portion of its gross gaming revenue -- in excess of 95% during 2005 -- is generated via table games, compared to less than 50% on the Las Vegas Strip. This is despite Macau's having far fewer table games than slot machines, about 1,400 vs. 3,400. This compares to about 3,200 and 55,000, respectively, on the Las Vegas Strip. The upshot: Macau, possessing only about 44% of the table games and 6% of slot machines contained on the Las Vegas Strip, has generated a similar level of overall gaming revenue.

Additionally, Macau's rapid expansion has come despite its lack of significant nongaming amenities such as restaurants, retail options, and convention/meeting space. These amenities are a major impetus behind the significant amount of capital invested on the Cotai Strip area of Macau.

Facility expansion

During the next five years, Macau and Las Vegas will both undergo significant expansion to capitalize on favorable demographics and meet increased demand. This investment, which is currently estimated to exceed $10 billion in Macau and $20 billion in Las Vegas, will include both gaming establishments and nongaming amenities.

However, it is important to note that while many projects have been announced, particularly in Las Vegas, several are in their early stages, and uncertainty remains concerning their ultimate completion.

In Macau, early indications show a lack of quality facilities to meet rising demand. The success of the Sands Macau since its opening in 2003 suggests that the market is primed to replace old-model establishments with high-quality destination gaming and hotel facilities. To meet higher demand, a number of new major facilities will be opened in downtown Macau during 2006 and 2007, including Galaxy Star World, Crown Macau, Wynn Macau, and MGM Grand Paradise. These casinos will focus on both the VIP and mass markets, with upscale amenities and hotel rooms. Slots are expected to increase by about 50% and gaming tables by 80% by the end of 2006.

However, the real test for the Macau market will begin in 2007 when the Cotai Strip opens for business. These facilities will add hundreds of mass-market gaming tables and thousands of slots and hotel rooms. Vast retail space and residential developments are also planned. Standard & Poor's expects that this development will result in many older, smaller operations shutting their doors. Still, given the large leveraged investment taken on by operators in this market, early success in Cotai is essential to financial stability.

The established, and arguably mature, Las Vegas market has repeatedly reinvented itself, as additional capacity has historically driven higher demand and revenue. By historical standards, the market should be in a position to absorb this expected additional capacity. However, a significant portion of it will be residential development, including condominiums and timeshare units, the magnitude of which is unprecedented in Las Vegas.

Regulation

While near-term regulatory risk in Macau is considered fairly moderate, Standard & Poor's views the longer-term outlook as uncertain. Despite the Chinese government's apparent commitment to transforming Macau into a major resort destination, this strategy remains in its infancy, and it is uncertain if, and for how long, this posture will continue.

Standard & Poor's views the regulatory environment in Las Vegas very favorably and considers it to be one of the more stable gaming arenas in which to operate in the U.S. We expect that this relatively stable regulatory environment is likely to continue in the future.

Wild cards

In Macau, the development of the Cotai Strip region into the "Las Vegas Strip of Asia" will introduce, in a major way, a significant nongaming component to a market currently characterized by a gaming-centric customer base, albeit the most favorable in the world. This is a strategy that took many years to evolve in Las Vegas and one that Standard & Poor's believes will also take some time to develop in Macau, notwithstanding potential demand in the region. In addition, the continued expansion of the Chinese economy and frequency of travel by Chinese citizens will remain factors over the intermediate term.

Of interest will be the Macau market's ability to maintain high gaming volumes amid vast development and to transform itself into a destination resort. High-end hotel rooms and retail outlets may not be a concept that translates easily to visitors from China: During 2005, the hotel occupancy rate in Macau was about 71% with an average daily rate below US$100.

Meanwhile, the Las Vegas Strip will once again be faced with a situation of absorbing significant additions in the face of an ever-evolving market climate. In the past, Las Vegas has been able to redefine itself and further solidify its presence as the world's best-known gaming destination. Both destinations have a lot riding on their current building booms as they vie for supremacy in the global gaming market.


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