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Parisian Macau opens Tuesday but China economy a concern for Macau gambling revenues

Check out the latest resort to open on the Cotai Strip
Will new capacity boost Macau's gaming industry?
Will The Parisian revive Macau?

Recovery is finally in sight for the world's largest casino hub, a welcome backdrop for the latest player to the Cotai Strip: The $2.7 billion Parisian Macau that opens Tuesday.

Consisting of 3000 rooms, hundreds of shops, a theatre, a water park and an Eiffel Tower replica, The Parisian is owned by Las Vegas Sands subsidiary Sands China and follows Wynn Palace's August debut and Studio City's launch last year.

Tuesday's opening coincides with a brighter outlook for the industry: Data two weeks ago showed August gambling revenues rose 1.1 percent on-year, the first increase since May 2014. But with the market just beginning to stabilize, is there enough appetite for another new casino?

"I see The Parisian performing within expectations, i.e. along with what the current market is doing. I don't see the project driving substantial new visitation to Macau beyond a potential short-term rise of about 10 percent in gross tourist visitor numbers to Macau," said Global Market Advisors' chief strategist Jonathan Galaviz.

Even now that the worst of Macau's downturn is over, companies operating in the market must do more to do in terms of creating unique entertainment options that go beyond just gambling, Galaviz continued.

China's slowing economy and its crackdown on conspicuous spending have drastically hit the amount of VIP spenders in the autonomous territory, piling on pressure for casino operators to diversify their businesses. Studio City, for example, boasts a roller-coaster, a 4D flight simulation Batman ride and the only Asian branch of world-famous nightclub Pacha.

The Parisian is covered in that regard, according to Grant Govertsen, founding partner of Union Gaming Group. Unlike Las Vegas, Macau consumers love themed entertainment so The Parisian's French theme is expected to appeal to mass market tourists, he explained.

"The Parisian should go a long way towards fulfilling the government's goal of more non-gaming revenue ... We think that Parisian will give consumers a reason to come back to Macau. Ultimately it will grow the gaming market and draw customers from further afield in mainland China."

Initially however, the Parisian's launch is expected to eat into the business of its parent firm Sands China, Govertsen warned.

The Eiffel Tower attraction, a half-size replica of the Eiffel Tower in Paris, stands illuminated at the Parisian Macao casino resort, operated by Sands China, a unit of Las Vegas Sands Corp, in Macau.
Anthony Kwan | Bloomberg | Getty Images

How Macau can get its mojo back

It remains to be seen how Macau can return to the 2012 glory days of $40 billion gaming revenues, after 2015 revenues tanked 34 percent to $28.92 billion. Projects like The Parisian don't appear to be the answer.

"The market needs conditions to improve from mainland China, not new capacity," summed up Fitch Ratings' senior director of gaming Alex Bumazhny. "The market remains susceptible to the macroeconomic and regulatory conditions in mainland China." Fitch estimates 2016 gaming revenues to drop 5 percent.

Indeed, mainlanders remain Macau's bread and butter, making up 11,580,791 of the total 17,559,151 visitors in the first seven months of the year.

It would take Macau over nine years to return to its prior gaming revenue peak, Bumazhny warned. "For that or a similar scenario to play out, China must avoid a hard-landing."

China also wields regulatory power.

"Macau relies on people bringing a lot of cash into the market, it also relies on junkets who operate by lending money to mainland residents ... there are also visa restrictions that can be used to further open or close the market," Bumazhny cautioned.

Other Asian gaming hotspots such as the Philippines have low tax rates of 10-15 percent on gross gaming revenue so they can afford to market aggressively to China's VIP players, whereas Macau's high 39 percent tax rate restricts how much operators can spend, Bumazhny flagged.

Budgetary limitations aside, there are other factors preventing Macau casinos from chasing other Asian wealthy players.

"I'm disappointed with the lack of robust direct air connectivity into Macau. I have been a critic of the lack of direct-nonstop air flights into Macau from other cities in Asia - there are some, but not enough," said Galaviz.

But if the U.S. Federal Reserve ends up leaving interest rates steady, that could indirectly benefit the leisure spending mindset of Hong Kong and China visitors, which in turns benefits Macau, he noted.

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