Betting on Macau
I count myself fortunate that the continuous quest for good investment opportunities takes me to some of the most exotic and beautiful places the world has to offer. Macau, on the western side of the Pearl River Delta in China, is one of my favorites for many reasons. As an investor, I’m interested in following up on investment opportunities. As a global citizen, I love Macau’s culture and rich history.
On the cultural front, Macau’s history and abundant museums cover the Portuguese colonial period and important episodes in Chinese dynasties leading up to the present, but one of the biggest draws for me is the fireworks. Each September, Macau hosts the International Fireworks Display Contest, perhaps the world’s largest such display. Other events that draw big crowds are the International Music Festival in November and an International Marathon and the Grand Prix, during which Macau’s streets transform into a racetrack similar to Monaco’s.
Of course, Macau’s real lifeblood is the casinos. It’s quite astounding to consider that Macau’s 2010 gaming revenue was four times that of Las Vegas, making it the world’s top casino market.1 Macau casinos are expecting 2011 gaming revenues of $34 billion whereas Las Vegas is anticipating 2011 revenues of $6 billion.2
Macau casinos cater primarily to the VIP clientele, with those bets beginning at $20,000 and quickly reaching into millions. A gaming revenue breakdown for 2010 shows VIP (72%), mass market (23%) and slot machines (5%).3 Baccarat is the most popular game for the VIP gamblers with a theoretical win rate of 2.85%. Baccarat gaming in Macau has accounted for over 90% of the gaming revenues there.3
Proximity to Hong Kong and major mainland towns in south China make Macaua a natural center for tourism and gaming. Since 2004, Macau’s gross casino gaming revenues have been growing at a compound annual rate of 30%, rocketing from about $5 billion in 2004 to $24 billion in 2010.1 Over a similar time frame, the number of casinos is up, various licenses have expanded rapidly, and tourism has seen a significant boost.3 And the growth has continued. Tourism revenues in 2011 are expected to increase 45% over the previous year.2
The surge of visitors has contributed substantially to Macau’s tax revenues, with gambling taxes accounting for 82% of government revenue in 2009.4 Moody’s currently gives the region a prime “Aa3” rating, and Macau law requires expenditures and revenues to stay balanced to avoid deficits. This bounty extends to Macau residents, who have benefited from many years of free education and have a high literacy rate.
The government encourages growth of non-gaming revenue such as entertainment, conventions and shopping, as well. Even with the high volume of annual visitors, the average stay lasts only 1.5 nights. The effort to get tourists to extend their stay is evident in the development of state-of-the-art entertainment venues. Major five-star hotels have opened to accompany casinos with high occupancy rates for rooms that range from $100-$300 per night. There are now approximately 20,000 hotel rooms with new projects expected to bring that number to 35,000 over the next five years.3
Infrastructure development can also contribute to growth opportunities. Massive landfill projects and bridge building, joining the islands of Taipa and Coloane to form the Cotai strip, have expanded and integrated Macau’s land area from 25 to 30 square kilometers between 2000 and 2010. Probably one of the most important developments for Macau in the near-term is the Hong Kong-Zhuhai-Macau Bridge, a series of bridges and tunnels that will connect the west side of Hong Kong to Macau and the Guangdong province city of Zhuhai. Scheduled for completion in 2015, the $10 billion project will enable surface travel over a series of spectacular venues including one of the world’s longest bridges, spanning 29 kilometers. Immigration facilities at two Chinese entry points are being expanded and a light rail system will connect Macau with Cotai.
While the potential for Macau looks good to us, casinos in Singapore are providing stiff competition and now represent the world’s second-largest gaming market. In addition, Singapore casinos enjoy a lower tax on gaming revenues. However, we still think Macau is a solid prospect for good investment opportunities.