China's large and growing traveling class is expected to provide strong demand for the Asian casino market in coming years.
The number of overseas trips made annually by China's 1.36 billion people now equates to a market penetration rate of 9%. This frequency compares with a 38.3% penetration rate for international travel among South Koreans and a 56.1% rate for Taiwanese. There is clearly plenty of room for Chinese outbound travel to grow.
We project that an income of $15,000 a year is the tipping point for Chinese to begin to feel financially stable enough for frequent foreign travel. A survey of Chinese outbound travelers released last year by Phocuswright, a U.S. travel-sector market research company, pointed to a notable acceleration in travel beginning as monthly income passed 8,000 yuan ($1,164).
This implies there are currently around 100 million consumer-class individuals in China with sufficient income to allow travel to foreign countries. That number is set to increase to 204 million by 2025, based on forecast wage growth and expansion of urban employment. This doubling of the available pool of outbound travelers should support growth of nearly 50% in annual visitation to Macau and healthy rises in traffic to other Asian gaming markets.
Such growth will be welcome after the decline in Chinese gaming demand experienced by Macau and other markets beginning in mid-2014, due in part to Beijing's anticorruption initiatives. Since last August, however, gross monthly Macau casino revenue, a strong indicator of Chinese gaming demand, has been notching year-over-year gains once more. This has been helped by new casino openings, lower hotel prices and increases in Chinese consumer confidence, national economic data and mainland property prices.
A cyclical recovery in VIP betting also appears underway. Macau VIP gaming has been on the rise since the opening of the Wynn Palace Cotai resort last August and the Parisian Macao the following month. There is now talk of opening new VIP rooms or junket businesses. A large junket agent entertaining Chinese VIPs in Manila, Melbourne and Seoul has also reported improvements in business in recent months.
Demand for casino visits is partly a function of the availability of integrated resort accommodation, the variety of entertainment facilities and accessibility. With the current wave of integrated resort openings in Macau having a substantially stronger emphasis on non-gaming facilities, the city should certainly satisfy the first two criteria. Ongoing rail, highway, airport, bridge, ferry terminal and border gate projects will improve access to Macau in the coming years, leading to stronger satisfaction among visitors.
Factoring in the developments currently underway, we recently raised our forecast for gross gaming revenue growth in Macau this year to 6% from 3%. Growth should continue at high single-digit rates for 2018-2020, then moderate slightly in 2021-2025.
The solid demand expected in Macau will be complimented by growth in the major emerging casino clusters in South Korea and the Philippines, as attractions and accessibility improve in both markets. With three integrated casino resorts opening in Incheon, close to Seoul's international airport, access will be greatly improved for Chinese travelers. A flight to Seoul from Beijing or Shanghai takes approximately two hours, versus three to four hours to Macau. Similarly, the opening of a new expressway in December has reduced travel time by 40% between Manila's Entertainment City resort cluster and the city's international airport.
JAPAN'S NEXT Japan will be the next market to watch. There is no doubt in our view that Chinese demand for visiting Japan is high. According to a survey last year by Chinese online travel agency Ctrip.com International, Japan was the "most worthwhile" destination for Chinese tourists. Japan is already one of the most visited countries for Chinese. Chinese visits to Japanese casinos will be strong if they are part of integrated resorts in major cities such as Osaka and Tokyo and reasonably accessible.
However, upsets in diplomatic relations between China and other countries could curb Chinese demand for travel to those destinations. Plans to deploy the U.S. Terminal High Altitude Area Defense anti-missile system in South Korea have been seen as a factor in policies limiting Chinese tourist travel to South Korea. Given that China accounted for almost half of visitor arrivals in South Korea last year, the potential impact on South Korea's 16 foreigner-only casinos could be large. Similarly, China's detention of 18 marketing staff from Australia's Crown Resorts is making foreign casino operators more cautious about their mainland activities. The impact of this incident could extend beyond Crown.
On the other hand, improving relations between Manila and Beijing and the Philippines' new visa-free policy for Chinese tourists could further improve visitor arrivals. Chinese visitors accounted for only 11% of total arrivals in the Philippines last year, with China representing the 10th highest-spending tourist market. Coming off this low base, rising Chinese spending should help the Philippine gaming sector, especially the new resorts in Entertainment City.
Macau has lost some market share to other markets in recent years amid a dry spell in new iconic attractions, a smoking ban on the main gaming floors of its casinos, and the overloading of its infrastructure. However, with new resorts opening again and infrastructure projects reaching completion, the city is likely to remain the preferred gaming destination for Chinese visitors. Its proximity to the mainland and common language, ease of visa access, low crime rate, and critical mass of world-class integrated resorts are key advantages. Operators elsewhere will need to consider how to draw traffic from other sources too.
Dan Wasiolek is a senior equity analyst with Morningstar. Chelsey Tam is an equity analyst with the company.