Macau gets a 'D' for diversification

The Studio City casino resort, developed by Melco Crown Entertainment, in Macau
Xaume Olleros | Bloomberg | Getty Images

Macau's efforts to diversify its economy away from betting tables have yet to yield much success, raising questions whether the world's largest casino hub can achieve its goal of becoming a broader tourist venue.

Fourteen straight months of declining gaming revenues have cast a gloomy shadow over Macau. The former Portuguese colony was once a hotbed for junkets of Chinese government officials and tycoons but Beijing's heated corruption crackdown has deterred lavish VIP spending, which makes up the bulk of Macau's gaming revenues. During the second quarter, leading casino operators reported double digit losses, with Galaxy Entertainment earnings plunging 46 percent on year.

Adding to the industry's woes is a newfound weak Chinese renminbi that makes it more expensive for mainland players to gamble.

Read More Weaker yuan deals Asia's casinos a losing hand

That's motivated officials to make the city less reliant on gaming revenues and lure in mass-market tourists. But building family-friendly amenities like the world's largest rooftop wave pool and a 3D museum have yet to work: Visitor arrivals fell an annual 3.5 percent in the first six months of 2015, with June arrivals tanking 7.6 percent on year, the worst performance since September 2012.

Macau's non-gaming activities accounted for less than 10 percent of gross revenues at its resorts last year, compared to 63 percent for Las Vegas, known as the poster child of diversification with its nightclubs, shows, and celebrity chef restaurants, Alex Bumazhny, director of Fitch Ratings, said in a Tuesday note.

"The biggest challenge for Macau casinos is to try and figure out what non-gaming amenities to develop," Grant Govertson, principal analyst at Union Gaming, told CNBC.

Because the government has yet to clearly state what it is looking for other than "diversification," there's confusion between what operators think the government wants them to build and what operators think customers will like, he explained.

Even Melco Crown Entertainment CEO Lawrence Ho admitted that nobody visits Macau for non-gaming amenities.

Why this expert remains optimistic on Macau

In an interview with the Macau Daily Times earlier this month, he said "non-gaming doesn't make any money and it will never make any money. For all the foolish people out there that think non-gaming is going to save [Macau's] day, it's not."

The biggest impediment to diversification could actually be what casino operators consider their main strength: proximity to China.

Because the special administrative region is the only place in China where gambling is legal, over 65,000 visitors from Hong Kong and the mainland arrive daily, resulting in each gaming table generating more than $12,000 per day -- more than double the most productive Las Vegas Strip casinos, Bumazhny noted.

"The strong gambling demand tends to shrink the non-gaming aspects as percentage of the whole pie and price out more casual gamblers and non-gamblers."

Govertson is optimistic, believing it's just a matter of time before the city surpasses Vegas.

"Between the wealth generation in China, the infrastructure being developed to move people around, and the resort supply being built in Macau and neighboring Hengqin Island, all the pieces are being put in place for Macau to eventually take the entertainment crown away from Las Vegas over a very long period of time."

Indeed, officials are hoping that an increase in resorts and hotels will increase the amount of Vegas-style tourist attractions.

Studio City, a new casino resort owned by Melco Crown is due to open this October with a Ferris wheel and a Batman-theme virtual reality ride, while the Parisian Macao, operated by Sands China, is slated to launch next year with a half-sized replica of the Eiffel Tower.

Still, handicaps such as the lack of a world class airport are likely to inhibit efforts to transform Macau. The new hotel rooms may also take time to come to the market.

All this makes catching up to the Las Vegas Strip's non-gaming mix difficult if not impossible, Bumazhny added.