The rate of economic growth in Asia fails to justify a proposed US$65-billion development pipeline for new casinos, according to Union Gaming Securities Asia Ltd.
“We estimate the Asian gaming development pipeline currently exceeds US$65 billion. Approximately two-thirds of this pipeline is in existing gaming jurisdictions, while the remaining one-third is in a solitary, green-field jurisdiction (Japan),” the brokerage said in a note issued on Tuesday.
“Given the scale of the pipeline relative to the earnings before interest, taxation, depreciation and amortisation (EBITDA) required to justify it, we think – for the first time in Asia – the amount of new supply is simply too much over too short a period.”
Union Gaming said returns for all industry participants would be depressed, and that numerous projects and even whole companies could fail. The current volume of projects was more suited to a 15-year timeframe, rather than the next five years, wrote analysts Grant Govertsen and John DeCree.
“The reality is that the current pipeline in just the existing markets (forget about Japan for now) requires EBITDA in Asia to literally double, even as the boom years in China gross domestic product (GDP) growth are behind it, and as so many of Asia’s wealthy individuals have already been captured,” the note said. “The math simply doesn’t work from a GDP perspective (excepting Japan).”
Union Gaming said big companies in the main gaming markets in Asia had US$13.6 billion in EBITDA last year, while the combined GDP of their main sources of gamblers was US$15.5 trillion, giving an EBITDA-to-GDP ratio of US$1 to US$1,141.
Union Gaming concluded that the amount of investment in casino gaming in the pipeline in Asia, excepting Japan, was four times too big, requiring double-digit annual GDP growth rates from 2018 to 2025 to justify it.
“We think 6.5 percent is a more realistic, if not somewhat ambitious, Asia-wide annual GDP growth forecast, resulting in nearly US$24.1 trillion in GDP by 2025,” its note said.
The firm calculated that if the EBITDA to GDP ratio stayed steady and same-store casino EBITDA grew by 5 percent annually, little extra GDP would be left for new casino gaming supply to tap into.
“This excess GDP above and beyond organic same-store growth is approximately US$2.3 trillion which, based on the current ratio of EBITDA to GDP, suggests just US$1.9 billion in incremental EBITDA available relative to the US$8.6 billion needed to justify the new supply,” the note said.
Union Gaming said the quality of the management of gaming companies and the quality of their facilities would separate the winners and losers.
“For too long Asia has been an unbelievably forgiving place to be a casino operator, thanks primarily to China’s rise. Even in Macau we think history can no longer be a guide, with blanket 20-percent-plus returns for all.
“There will be a notable and growing divergence in operator performance in virtually every market in Asia, with market share gains captured by the most capable (Singapore is a great example, with the dual expansions likely to be detrimental to Resorts World Sentosa’s market share).”
The brokerage said the advent of casino gaming in Japan could exacerbate the glut of supply.
“Regulatory factors like the locals entry levy could force operators to try and capture a greater-than-anticipated share from other Asian markets, like Macau,” the note said.
“If this is the case, then the result will be even more depressed return-on-investments for the current excepting-Japan pipeline via some combination of share loss to Japan and increased marketing expenses as they try to stop the share loss from happening.”
Union Gaming concluded its analysis by saying more reliance would be placed on the VIP segment to deliver a return on the investment in capital, as the new casino developments were largely in highly competitive markets with established offerings to mass-market gamblers.