August 10, 2018 / 4:18 AM / 11 days ago

Breakingviews - Macau moguls’ rivalry threatens cost discipline

HONG KONG (Reuters Breakingviews) - A fight for big spenders in Macau has made earnings volatile in China’s gambling hub. Battle lines are being drawn in the gaudy Cotai Strip, where casinos are pulling out the stops to pull in the punters. The conflict is likely to spread, and could weigh on profit margins.

The name of Wynn Palace is seen on the hotel, U.S. casino tycoon Steve Wynn's newest resort, during its opening in Macau, China August 22, 2016. REUTERS/Bobby Yip

    Wynn Macau, which caters to wealthier guests, appears to have been caught off guard last quarter. EBITDA missed expectations, and revenue grew by a modest 12.5 percent to $1.2 billion, lagging the broader market’s 17 percent growth. The rocky results took shareholders by surprise; stock has fallen by 10 percent since the release on Aug. 2. The company now trades at a forward price-to-earnings multiple of 14.5 times, lower than its Hong Kong-listed peers.

    Wynn management blamed cutthroat competition. Rival Galaxy Entertainment Group – already a favourite for well-heeled Chinese visitors – grew its top line twice as fast as Wynn. Less bling outfits also stepped up to the table: Sands China, for example, increased VIP gaming revenue by a third compared with a year earlier, according to research by Union Gaming.  

    With an estimated $38 billion of gaming revenue in play this year, the tiny territory is teeming with weird and wonderful schemes to entice visitors. This year alone saw the launch of MGM China’s cavernous new casino complex, Melco International’s Zaha Hadid-designed hotel, and an e-sports stadium: meanwhile SJM Holdings has a Versace-branded hotel and a theme park in the works.

    Operators might feel compelled to up the ante, for fear fickle guests will gravitate to the next gimmick. Investors should expect more marketing and incentives targeting VIPS and middle-class Chinese clients - a growing market. They should also watch out for signs of frantic one-upmanship if casinos start splurging on Michelin stars, gilt, and gondolas. That could strain balance sheets.

    The rising tide of tourists means stakes are high. Arrivals increased by 5 percent last year as more than 20 million Chinese visitors swarmed the city. Macau’s moguls will fight for their share, but hopefully not at any cost.

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