Macau's skyline is set to change as more casinos open on the Cotai Strip, but there may not be enough demand for all the mass-market venues that are being developed. Image source: Getty Images.

There are only three casino operators currently on the Cotai Strip in Macau, but with slumping revenues now running to 25 straight months in the gambling oasis, the prospects of having three more venues open within the next year ought to be a cause for concern. And because all are now focusing on theme-park, family-style entertainment, rather than just VIP high rollers, they may be diluting their chances of recovery.

Las Vegas Sands (LVS -1.86%), MGM Resorts (MGM -1.68%), and Wynn Resorts (WYNN -1.87%) will all be opening venues within proximity to one another that will cause them to compete intensely for a slice of a shrinking pie.

A very deep hole to climb out of

According to Macau's Gaming Inspection and Coordination Bureau, monthly gross revenues in June fell to nearly 15.9 billion patacas, a decline of 8.5% from the year-ago period, but within the broad range of a 5% to 12% drop that analysts expected and a smaller drop than the nearly 10% falloff in revenues the region had experienced in the two months prior.

Considering every month of 2015 featured double-digit declines -- and most of them running 30% or more -- it appears the worst may be behind Macau. Indeed, cumulative gambling revenue is down just 11.4% year to date, compared with the 37% plunge it took a year ago, and because it was reported that family-friendly entertainment helped take the sharp edge off the losses, the operators are betting their investment on the Cotai Strip will still pay off in time.

Perhaps, but June's revenue is the lowest it's been since 2010, and the three new casinos coming to Cotai may not so much increase the size of the pie as just more narrowly slice the existing one. Everyone may have to settle for a new, lower base as being the norm.

Data source: Gaming Inspection and Coordination Bureau. Chart by author.

Macau, of course, is the only place in China where casino gambling is legal, but it has fallen hard in the wake of Beijing's anti-corruption campaign, which was aimed at officials and politically connected businessmen. Junket operators, or the middlemen who bring in the VIP gamblers and loan them the money they use to gamble with at the casinos, were caught up in the campaign, leaving the gamblers looking for other locales to play.

Enough room to grow?

Of more immediate concern to the venues due to open is just how many table games they'll be allotted by the government. When Melco Crown Entertainment (MLCO -3.35%) opened its Hollywood-themed Studio City last year, it was only given 250 table games, and it chose to not assign any of them to the high rollers -- a decision it is now reversing. Wynn Resorts says its Wynn Palace that's scheduled to debut next month can support 500 tables, and Las Vegas Sands' new Parisian has asked for 450 tables.

That's likely just wishful thinking as Galaxy Entertainment Group (GXYEF -2.00%) was also only granted 250 tables when it opened its two casinos.

That's why the operators are counting so heavily on non-gambling revenues to pick up the slack. With Beijing not inclined to encourage the same sort of gambling business it did when Macau first burst on the scene, the casinos need theme park entertainment, food concessions, conventions, and meetings to make up the difference.

Headwinds mounting

While June's results may have been better than expected, there doesn't appear to be enough momentum for the recovery to last. The Economist says the five-year plan laid out for the island is weak, with vague goals that will be difficult to obtain. It believes Macau's economy will contract further this year, with the potential only for a partial recovery coming sometime in 2017.

In particular, it points to Beijing's goal to raise non-gambling revenue sources from the 6.6% level they generated in 2014 to 9% by 2020 as being at best modest since "the high-end gambling boom has gone for good."

Moreover, it says the hope that those other revenue sources would pick up the slack have been a disappointment. Such events tumbled 20% in the first quarter of 2016, while participants and attendees were cut in half from the year ago figures. Wynn Palace is going to be adding 1,700 rooms to available inventory, The Parisian will feature 3,000 rooms, and the MGM Cotai will put another 1,500 rooms up. They will also be adding hundreds of thousands of square feet of meeting, incentive, convention, and exhibition space.

Analysts feel the expected returns the casino operators are banking on are wildly optimistic. Analysts at Nomura have said Wynn's expectation for the Palace to generate $630 million to $850 million in property earnings before interest, taxes, depreciation, and amortization is very bullish, exceeding its own estimates by 94% to 162%.

With more restrictions added to gambling in Macau, such as the ban on placing bets via phone for third parties, a difficult Chinese economy, and enticing competitive gambling destinations elsewhere in the Asia-Pacific region, the allure of the island may continue to fade and the pie available to everyone may shrink further still.