Macau Palace eats its own lunch on VIPs

Macau Palace eats its own lunch on VIPs

Tuesday, August 30, 2016 Posted by Andy McCarron
New property in Cotai not built for mass market

The newly-opened Wynn Palace will likely cannibalise the VIP and premium mass custom from the company’s existing property on the peninsular more than was previously estimated, according to new analysis from the team at Morgan Stanley.

After a recent field trip to the gambling enclave, the team found the Wynn Palace to be the “most luxurious guest experience” available on the Cotai strip that will potentially attract the highest market share of high-value customers.

Wynn’s total room capacity has been boosted by 169% taking its total hotel room share percentage from 5% in the second quarter of 2016 to 10% by the end of next year. The M Stanley team suggest a similar boost could happen to the company’s share of mass-market revenue.

To counter this optimistic note, though, the analysts suggested there was already evidence that the low-growth environment in Macau meant it was “more difficult to ramp up a new property” and, moreover, there was evidence of cannibalisation from the Wynn Peninsular property.

“We saw limited impact on City of Dreams, MGM and SJM last week, but witnessed customer movement between Peninsula and Palace for Wynn,” the team wrote early this week. “This is similar to the case of Studio City cannibalizing City of Dreams since its opening.”

The team also point out that Wynn’s attempt to attract the “mass grind” customers will be hampered by the design of the Palace which were originally built for VIP casino play and might be seen as being too intimidating for the mass crowd. “We think the grind mass segment is important because it is growing, has a higher margin structure and could easily be moved from Cotai peers,” said the M Stanley team.

Lastly, the team believe that Wynn will struggle to gain its fair share of the VIP market due to its history of paying lower-than-average market commission rates. “Also, junkets' market share and bargaining power may continue to rise,” they add. “The three junkets at Palace (Suncity, Tak Chun and Guangdong) overlap with its Peninsula casino's as well as most peers’.”

The Wynn Palace has had a troubled opening after the Macau authorities only allocated the company a further 100 tables at open, meaning the company has had to shift tables around its two casinos to make up the shortfall at the new property. The rejig means that the new property has shifted 250 tables to the Palace, leaving the Peninsular property with 270 tables.

The M Stanley team suggest this movement of tables will benefit Wynn’s neighbor on the peninsular, the MGM China property, which now has 23% more mass tables at its property. MGM’s own Macau property is due to open in the second half of next year.

In its review of the second quarter, the M Stanley team suggest that earnings across the casino sector in Macau fell 6% quarter-on-quarter to US$1.43bn of property EBITDA. This also represented a 4% fall year-on-year. “Without meaningful pick-up in market gross gaming revenue, we believe the addition of supply in the third quarter 2016 from Wynn and Sands (the Parisian opens late this quarter) will push consensus EBITDA estimates lower in the near term.”

Totally Gaming says: The pressure caused across the market by the further supply of rooms in Cotai has been predicted, so the findings of the M Stanley team are no surprise. As the team say, a meaningful recovery of gross gaming revenue will be needed before the casinos will reverse the drift in profits. That remains very much out of their hands. It is indicative that Wynn now has a Cotai property that is genuinely not fit for purpose. The company has shifted its business plans to aim at a more mass market (and authority-friendly) proposition. But moving tables around between properties does nothing to alter a casino layout that was designed for a VIP clientele in mind.

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