The idea the Cotai Strip on China's Macau gambling oasis could become something like a Las Vegas-style family entertainment destination may be fading. Las Vegas Sands (NYSE:LVS) confirmed that its new Parisian casino scheduled to open later this year will indeed have VIP junket rooms. Following Melco Crown Entertainment's (NASDAQ:MLCO) decision to also add VIP tables at Studio City indicates a singular, mass market focus in China may not be sustainable.
Macau is the only in China where gambling is illegal. While it has enjoyed phenomenal growth since Las Vegas Sands Venetian opened in 2007, Beijing became concerned with the fact that high rollers held sway over casino operations. In a widespread campaign against corruption, the government crackdown snared a number of junket operators in its net. Junkets are middlemen who fly in VIP gamblers to the island, lending them money to bet with, and earning a percentage from the casinos for bringing them in.
That symbiotic relationship made Macau one of the richest countries in the world, according to the World Bank. But coupled with a slowing economy and junket operators finding it difficult to get financing, Macau has endured 25 consecutive months of falling gambling revenues. Even so, the island still ranks third globally in GDP per capita, behind only Luxembourg and Switzerland.
Yet Beijing has a different idea for Cotai. Rather than high rollers, it wants the region to be developed in a manner similar to Las Vegas (hence its being known as the "Cotai Strip"), with games and entertainment that would have broader appeal. It changed its visa rules, which had an impact on gamblers coming in, and it slowed approval of new casino construction while demanding Macau become an entertainment and leisure center as part of its five-year plan.
Galaxy Entertainment Group (NASDAQOTH:GXYEF) and Melco Crown Entertainment were the first to develop integrated venues on the Strip, but because of the tight controls that have been placed on what can be developed, their casinos were only granted 250 gambling tables each. Macau has table growth to just 3% annually through 2022 when the last of the casino concessions expire.
With Wynn Resorts' (NASDAQ:WYNN) Wynn Palace scheduled to open next month, followed by Sands' Parisian, and MGM Resorts International (NYSE:MGM) opening the MGM Cotai early next year, competition for limited mass-market gambling dollars will be intense. It's expected none of them will be allocated any more tables than either Galaxy or Melco won.
It was due specifically to the limitations on just how many tables a casino could have that drove Melco to completely forego putting in any VIP tables at its Studio City casino when it opened last year. It felt it couldn't afford to assign any of them to the high rollers, but in the wake of its horrible first-quarter earnings results, it has reportedly rethought that decision and is ready to install three VIP tables.
With Las Vegas Sands also saying VIPs will be part and parcel of the Parisian, it's clear that Macau, or rather Cotai, can't be an either-or proposition.
The mass market was seen as Cotai's salvation as the VIP market took a downturn. The junket system itself was seen as unsustainable, especially in light of the anti-graft campaign Beijing was running, but Melco's disappointing results indicate that Cotai isn't about to be Las Vegas West.
While it seems doubtful Macau will ever reach the mass-market saturation that Las Vegas exhibits -- fully two-thirds of the casinos' revenues come from sources other than gambling -- the challenge for Macau will be to create a large enough mix that makes it a compelling destination for Chinese nationals to visit, but one that does repel the high rollers.
Neighboring locales such as Australia, Singapore and the tiny island of Saipan may soon become more desirable gambling destination for VIPs. Las Vegas Sands is betting they'll still have an interest in Macau that will save Cotai from itself.
Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.