Golden Strip – Cotai 2.0 to drive Macao’s next expansion phase

18 April 2014

Macao, which overtook the Las Vegas strip to become the world’s biggest gambling hub in 2006, is now looking forward to the next stage in its development.

To date, growth in Macao’s $45.2 billion gambling industry has been built on resorts located on a narrow strip of land known as Cotai 1.

Located between Taipa and Coloane islands, Cotai is a piece of reclaimed land of 5.2 square kilometres and is expected to form the basis for a wave of future development, known as Cotai 2.0. By the end of 2017, all six of Macao’s gaming concessionaires will have completed multi-billion dollar projects on the strip.

The development of these luxury resorts is expected to ease capacity constraints in the casino industry in Macao, which may see a slowdown in growth until the new properties in Cotai begin to come online in mid-2015.

“Cotai 2.0 will basically bring a new wave of gaming areas which will always constitute the engine for further developments,” Luis Mesquita de Melo, Partner of MdME Lawyers said.

The new resorts will cater for a different profile of player, the so-called “mass premium player”, bringing about a more diversified entertainment industry able to attract families and longer staying visitors, similar to a Las Vegas-style entertainment city, Melo said.

Macao had record gross gambling revenue in 2013, with growth of 19 percent over 2012. After a slowdown ahead of the Chinese New Year, gross gambling revenue picked up again in February, leading analysts to upgrade their forecasts.

Sterne Agee has raised its February forecast to MOP 36.4 billion ($4.5 billion), up 35 percent year-on-year from its previous estimate of growth of between 26 to 28 percent. It also says March could set new records. A recent report by Nomura Securities predicted Macao’s casino revenues could double in the next five years to $80 billion.

Anna Thung, lead analyst at Fitch Ratings, said the gambling industry had made a significant contribution to Macao’s financial stability. The government is debt free and has achieved substantial budget surpluses, averaging 15.4 percent of Gross Domestic Product (GDP) from 2003 to 2012, significantly outpacing the median of negative 0.1 percent amongst its AA-rated peers. As a result, Macao has been able to accumulate a large pool of fiscal reserves, which are expected to reach MOP 237 billion ($29.6 billion), or 59 percent of GDP, in 2013.

Cotai overtook the Macao Peninsula as the most popular gaming destination in Macao in 2013. Earnings before interest, tax, depreciation and amortisation (EBITDA) on the strip in the first half of 2013 were HKD$ 17.25 billion ($2.2 billion), representing a 54.2 percent share of the market, compared to HK$ 14.56 billion, or 42.9 percent for the Macao Peninsula, according to South China Research.

“Cotai has played a critical role in driving gaming revenue growth since 2007. In addition to adding much needed gaming capacity it greatly expanded the room inventory. More importantly, it helped reposition Macao as a true international gaming and entertainment destination,” said Andrew Klebanow, principal at Gaming Market Advisors.

Hitting the $100 billion mark

“In terms of short-term growth Gaming Market Advisors expects to see a reasonable annual growth rate of 11 percent to 15 percent. After the next phase of development is complete and Cotai 2 is fully operational it would not surprise us to see gaming revenue pass $90 billion by 2021. Ultimately Macao will be a $100 billion market.”

US casino giant Las Vegas Sands was the first to open on Cotai in 2007. That resort, the Venetian Macao, is a Venice-themed property featuring replicas of Venice landmarks costing some $2.4 billion. The resort attracted more than 23 million visitors and generated earnings before interest, taxes, depreciation, amortisation and rental costs (EBITDAR) of nearly MOP 4 billion the following year.

“Since the liberalisation of the gaming industry in Macao, Sands China has seen very significant growth,” Edward Tracy, President and Chief Executive Officer of Sands China Ltd said. The company introduced the integrated resort model to Macao, pioneered in Las Vegas, helping raise the critical mass of a diversified tourism product, drawing increased and lengthier visitation to Macao.

Melco Crown followed Sands China, opening the City of Dreams in 2009, while Galaxy Entertainment’s Galaxy Macau opened to the public in 2011. Sands China’s Sands Cotai Central was the latest addition in 2012.

All three have ambitious expansion plans.

Sands China plans to build a Paris-themed casino resort with approximately 3,000 rooms, 2,500 table slots and 450 table games. The resort, the Parisian Macao, requires an investment of $2.7 billion. There will even be a replica of the Eiffel Tower. The project is expected to open in late 2015.

Melco Crown plans to invest $1.7 billion to open a film-themed casino resort, Macao Studio City, with 1,600 rooms, 500 table games and 1,500 gaming machines in mid-2015.

Galaxy Entertainment will double the space at Galaxy Macau and add 1,350 rooms, up to 500 table games, and more than 1,000 gaming machines. The proposed investment for its phase 2 would be around $2.5 billion, with the completion date set for mid-2015.

Meanwhile, MGM China, Wynn Macau and SJM Holdings have also announced major investments for Cotai.

MGM China began construction on its Cotai project last year and said on a recent conference call that it has decided to increase the “scope and complexity” of their entertainment offerings. As a result it has upped the project cost to $2.9 billion from $2.6 billion.

The majority of the conventional piling work was completed in 2013 and it has now begun the basement substructure.

The project was slated to have 1,600 hotel rooms, 2,500 slots, and up to 500 gaming tables. Non-gaming offerings will occupy more than 85 percent of the gross floor area. The project is anticipated to open in early 2016.

In January, Wynn Macau revealed its Cotai project, Wynn Palace, which is expected to open in the first half of 2016. It will include a 1,700-room hotel, performance lake, meeting space, spa and other non-gaming offerings.

SJM Holdings showcased its Lisboa Palace project in February. The project is scheduled to open in 2017. It will provide up to 700 gaming tables, over 1,200 slot machines and other entertainment facilities including a grand wedding pavilion and a multi-purpose theatre.

Dr Ambrose So, chief executive officer of SJM Holdings Limited said: “We are building the Lisboa Palace, our next resort project on Cotai, because we believe that the future development of Cotai is critically important for Macao to sustain its growth over the long term, by providing greater diversification of activities for vacationers from around the region.”

Widening the net

Compared to the Macao Peninsula, Cotai provides more space for operators to develop their non-gaming business, an element that is expected to broaden the appeal of Macao and further boost revenue.

For example, the 550,000-square-metre Galaxy Macau in Cotai reported a 12 percent increase in non-gaming revenue from the second quarter of last year to the third quarter, while its 119,841-square-metre sister resort StarWorld Macau only reported a three percent increase.

“So, instead of only witnessing gamers gravitating to a city viewed solely as a gaming destination, what we are seeing is that the leisure, entertainment and business options presented by the integrated resort model are attracting a diversity of visitors, including families. As a result, the gaming industry continues to grow, mature and adapt, and Macao itself is being transformed from a gaming destination to a world centre of tourism and leisure, and one of the region’s entertainment capitals,” Sands CEO Tracy said.

Cotai also boasts more than 120,000 square metres of MICE space for conventions and meetings facilities and in February welcomed about 8,700 delegates to a Tupperware Brands Corporation conference. It was the largest conference held to date in the integrated resort city.

Last year Cotai also played host to a range of entertainment events, from March and September’s “The Voice of China” concerts to February’s Race with the Stars and December’s Asia-Pacific Film Festival.

Sands China reported that television and online broadcasts of events held at, or sponsored by, Cotai Strip Resorts, reached an estimated audience of more than 900 million viewers in mainland China and over 1 billion worldwide.

Visitors from mainland China have been instrumental to Macao’s growth. The territory is the only place in China where gambling is legal, and visitors from across the border rose 15 percent to 1,689,277 in January 2014.

According to Macao’s Statistics and Census Service, there were 2,503,609 visitor arrivals in January, up 8 percent year-on-year. The second biggest source of arrivals was neighbouring Hong Kong, with 494,149 visitors, Taiwan was third with 77,859, South Korea fourth at 59,143 and Japan fifth at 25,736. Long-haul visitors from the United States, Australia, Canada and the United Kingdom declined but there was an increase of 6.3 percent in the number of visitors from Russia.

Despite the high number of China tourist arrivals, some analysts say Macao has only scratched the surface of the mainland potential. For example, in percentage terms Macao currently only attracts a fraction of the population of China when compared with US visitors who travel to Las Vegas.

In 2012, about 33 million people, or about 10.5 percent of the US population, travelled to the US gambling hub, compared with 17 million Chinese visitors to Macao, or about 1 percent of the total population.  

The bigger picture

Macao’s increasing integration with China’s Guangdong province will also provide further opportunities for growth and the Hengqin New Area is a prime example.

Hengqin, an island roughly three times the size of Macao, has been designated as a special economic zone. It’s located to the south of Zhuhai City and is connected to Macao by a bridge.

The island offers an alternative and more economic option for accommodation to Macao itself, thus appealing to the rapidly growing mass market sector of the gambling industry.

The Chimelong International Ocean Resort, the first resort in Hengqin, was opened on January 18 and reported about 500,000 visitors from 28 January to 6 February.

Prof. Leonardo Dioko of the Institute for Tourism Studies in Macao says, “Hengqin will significantly help alleviate the pressure and burden of rapid growth in Macao and will act as an escape valve for tourism activity.”

“We are fortunate that the central government has been very favourable to aligning Hengqin’s development to that of Macao, particularly of Cotai,” he said.

Meanwhile, ever improving infrastructure is expected to improve access to Macao and bring in more day-trippers. For example, the Hong Kong-Zhuhai-Macao Bridge, is widely considered as a “game changer”. The bridge will reduce the journey time between Hong Kong and Macao from the current 1 hour and 5 minute ferry ride to less than 30 minutes by car.

Recent reports suggest that the bridge is on track to open by 2016.  

“Looking ahead, Macao and the region are set to prosper for many years to come as major infrastructure works come on stream that will greatly improve access to Macao from mainland China and transform travel within the region,” Dr Lui Che-woo, Chairman of Galaxy Entertainment Group commented.

Other infrastructure projects include the Macau Light Rapid Transit and Macau International Airport Capacity Upgrade, which will double the current airport capacity to 12 million people per year. The investment in the Macau Light Rapid Transit project is MOP 7.5 billion. Meanwhile, the Macao Special Administrative Region government has commissioned France’s ADP Ingenierie to work out a development plan.

Prof. Dioko described Macao as “no longer a destination in its own right” but “part of the greater urban agglomeration”. He believes that Macao’s integration with Hengqin, Guangdong and mainland China – facilitated by these infrastructure projects – will all be good for Macao.

From a quality of life perspective, and at a personal wellbeing level, “the growth of the Macao gaming industry has clearly raised local standards of living and opened up job opportunities,” professor Richard Whitfield, president of the East-West Institute for Advanced Studies, said. “Overall, the growth of the gaming industry has been positive for the quality of life in Macao.”

In the future, Macao is also going to face more competition from other Asian nations, such as Japan, which is currently in the process of opening up its gambling market. However, most analysts say Macao won’t lose its dominance with Cotai development playing a key role in helping to protect the SAR.

“Much like Las Vegas has become resilient to regional gaming growth in the United States, so will Macao be able to defend its market share as casinos open in emerging markets,” Gaming Market Advisors’ Klebanow said. (Macao Magazine – Brian Yeung)