The casino industry generates income from people who engage in gambling. It is due to the social and economic stigma attached to gambling in a casino that this is generally regarded as a negative activity in many countries and hence considered illegal to operate in certain geographies. Owing to these reasons, the casinos are mostly concentrated in and around tourist destinations and are usually built near or are combined with resorts, restaurants and cruises.
The global casino industry grew rapidly in the past two decades and nearly doubled its revenue over the last decade from $100 billion (2006) to $171 billion (2014), this was primarily due to the legal approvals on casinos by several nations.
The casino industry mostly occupies the discretionary part of the consumer spending and hence is largely impacted by the general state of an economy. The casino industry was mainly concentrated in North America (majorly in Las Vegas) and occupied over 60% of the market share prior to the 2008 financial crisis. Moreover, during the 2008 global economic meltdown, the casino industry was negatively affected due to a substantial reduction in consumer spending on casino games. Las Vegas countered the decline in the gaming revenues through a shift towards a more integrated leisure hub, which brought in additional non-gaming revenues owing to a surge of tourists engaged in leisure activities. At the same time, the casino industry picked momentum after 2009, this was solely led by the Asia Pacific region, which saw a staggering revenue growth rate of 26.2% CAGR (2009-14) on account of a surge in new casinos in Macau and Singapore and the regions emerged as major new resort destinations. Further, this growth was attributable to an increase in VIP gaming revenue in Macau (the only part of China where casino gambling is legal). The easy transferability of funds from China to Macau through junket promoters, middleman, who brings high rolling players as well as provide them with credit (as China’s currency control limits the outgoing funds to $6,500 per trip, less than the amount typically gambled by the VIP players) and this led to a host of VIP gamers from mainland China to Macau between 2009 to 2014.
However, a similar growth could not be replicated in other parts of the world. The United States (majorly Las Vegas) registered a CAGR growth of only 3.8% (2009-14) because of the stringent gambling regulations requiring a transaction of more than $10,000 in a day to be documented with the identity of the individual. Thus, a slow growth in the USA coupled with a rapid growth in the Asia-Pacific region made Asia Pacific stand at par with the US in 2014.
Presently, Macau is the largest casino destination in the world followed by Las Vegas (most popular casino destination). In 2002, when the Macau government ended its monopoly over the gambling industry, few major casino operators from Las Vegas entered the market and made Macau the world's top casino hub in terms of revenue, surpassing Las Vegas in 2005.
Moreover, there is a fundamental difference in the operating model of casinos in Macau and Las Vegas, while Macau focuses on table gaming revenues (which includes VIP gaming), Las Vegas focus on slot machine revenue (which is solely mass market). Thus, although Las Vegas had higher visitors, but average revenue per visitor has always been much higher for Macau. Additionally, post economic crisis Macau has shown an exceptional rise in revenue due to an increase in the table gaming revenue (especially VIP gaming revenues), until 2013.
Following the 2008 global crisis, most of the casino operators registered a healthy growth in their revenues up till 2014. However, the past 1 or 2 years have been taxing for the major casino operators (who derive some or a major portion of their revenue from Macau) on the back of the regulatory challenges in China, which resulted in a sharp decline in their revenues in 2015. SJM Holdings Ltd. was the worst performer and reported a decline of 38.7% in the revenue in 2015 as it derived a major portion of its revenue from VIP gaming. The firm saw an approx. 48% decline the VIP gaming in 2015, catapulted by a low number of VIP promoters as well as lower VIP gaming tables as compared to 2014. The revenue from North American operations for these players remained almost constant during the period.
Similarly, on the profitability front, all the operators took a hit in Asia Pacific operations (majorly Macau) due to the reasons mentioned above, while the North American operations (majorly Las Vegas) either remained constant or saw an increase.
In addition to the gaming operations, the casino operators derive revenue from other businesses such as room tariffs, food & beverage, retail and entertainment, etc. Thus, the overall profitability of the operators varies depending upon their performance in these businesses as well. In 2015, Las Vegas Sands and Wynn derived 80% and 66% of its revenues from casino operations, while SJM, Galaxy and MGM derived 95%, 99% and 55% of their revenues from casino operations. MGM fared worse than the Las Vegas Sands and Wynn due to the difference in economies of their operation. MGM derived a higher proportion of its revenue from Las Vegas vis-à-vis Las Vegas Sands and Wynn, which derived a major portion of their revenue from Macau.
*Adjusted for Exceptional Items (As Reported by Company)
In order to counter the decline in the gaming revenues in Macau operations, the casino operators started exploring new options in mass gaming market since 2013. Cotai’s (an island near Macau) shift towards an integrated leisure hub provided a targeted mass gaming market to these operators, who started investing in facilities in Cotai as can be seen in the substantial increase in the CAPEX during this period.
Overall, all the operators were impacted on the liquidity front due to the reduction in profitability from Macau operations, this forced the operators to either borrow debt or draw down on their cash balances for funding the CAPEX requirements. This, in turn, resulted in a low cash availability for debt servicing (CADS), which negatively impacted their DSCR and interest coverage ratios. The CFO to CAPEX declined for all operators owing to an increase in the CAPEX as well as reduced CFO due to reduced profitability. The debt to equity was abnormally high for Wynn (420x, 2015) as most of the CAPEX was funded through debt, while the company experienced a sharp reduction in equity in 2012 due to the cancellation of $1.5 bn worth of shares of a certain shareholder, who was deemed unsuitable (funded through long-term promissory notes). The debt to equity was high for MGM owing to a huge debt pile on its books (resulting in low DSCR owing to high interest expenses and lower CADS). Las Vegas Sands, SJM and Galaxy funded their CAPEX through internal CFO. SJM and Galaxy had a very healthy debt to equity ratio (owing to minimal debts on their books, post-2013), which placed them better than the rest of the operator on the liquidity front.
The ROIC for all the operators saw a decline due to an increase in investments by these operators in Cotai, which did not start to generate the revenue as well as the decline in the revenue from their existing operations in Macau.
Although, tighter regulations over the casino industry in Macau combined with a sluggish economic growth slowed down the growth in the industry, which gradually shifted to other avenues of revenue such as the integrated leisure hub to draw demand from mass markets and did not solely relied on the gaming revenues. For instance, Galaxy Entertainment Group Limited witnessed a rapid growth in 2011-12 after the introduction of Galaxy Macau, which was Macau's first Asian-centric resort destination and one of the largest leisure complex in Asia during the aforementioned period.
In addition to the above, Televisory believes that Cotai’s shift towards integrated leisure hub may play a key role in sustaining the industry’s growth since all the major casino operators are entering Cotai for the revival of their growth and are targeting a mass gaming market as well as building an integrated leisure hub. This will provide an additional source of income apart from the gaming operations. But, regulatory challenges and a continuous increase of casinos may impact the industry’s growth in the medium term. Moreover, there is an increased threat from upcoming markets like Singapore (which is already the third largest market) and probable new entrants (e.g. Japan, which is on the verge of legalising casino operations), who are already well placed in terms of tourist infrastructure and connectivity to attract international tourists, On the other hand, the demography of visitors to Macau was largely from mainland China.