A new report on the global gaming industry from Morgan Stanley focuses on three key issues likely to shape the casino business: mass market revenue, VIP play and capital returns to shareholders. As the engine of global gaming growth Asia is a key focus of the report, both in shaping the questions and providing clues to what’s ahead.

Leveraging Morgan Stanley’s worldwide reach, the report estimates global gaming revenue last year at $423 billion, only 35% of it from land based casinos. Lotteries accounted for 29% at $121 billion, with what the report terms “other gambling” such as sports betting and parimutuel racing as the next biggest chunk at $118 billion or 28% and online gambling at $37 billion or 9%. Of the $146 billion from land based casinos, US commercial and tribal operations took in $67 billion or 46%, Asia and Australia casinos $61 billion or 42%, and the rest of the world $18 billion or 12%.

Galaxy Entertainment Group, opening extensions of its Galaxy Resort in May, is one of Morgan Stanley’s top five picks in the global gaming business. (AP Photo/Vincent Yu, File)

For the casino sector, analysts led by Morgan Stanley Asia’s Praveen Choudhary in Hong Kong frame key issues as three debate questions: Will new casino supply drive mass market demand? Is the global VIP market shrinking or is being dispersed more widely? How sustainable are gaming companies’ capital returns to shareholders?

On the mass market side, the “build it and they will come” formula works, but it’s not a simple relationship. Growth in gaming positions and hotel rooms has historically correlated with gaming revenue growth. The report puts greater weight growth of hotel rooms, good news for Macau, where new Cotai resorts will add thousands of rooms but will have table growth constrained by government limits, and Singapore, where Genting Singapore, operator of Resorts World Sentosa, is due to open a 400 room hotel about 15 minutes away from the casino complex.

Supply growth may not drive revenue growth if the market is saturated – infrastructure improvements and non-gaming diversification can remedy saturation – economic growth slows, regulation stiffens or regional competition increases. Moreover, even if revenue does grow, increased supply can lead to lower margins and lower profit growth, at least temporarily, due to the ramp up phase featuring higher fixed costs and increased promotional expenses.

Morgan Stanley estimates the global VIP market last year at $36 billion, a quarter of total land based casino revenue. Macau’s $26.4 billion accounted for 75% of VIP revenue, with Singapore at $3 billion taking 8% and the Las Vegas Strip, the only notable VIP market outside Asia Pacific, with $1.5 billion at 4%. Australia and New Zealand, with a combined $1.4 billion was the only other market with more $1 billion in VIP revenue. The bank says the VIP market is shrinking as well as shifting.

Global VIP revenue fell 8% last year. Reasons for shrinkage appear largely cyclical, such as China’s anti-corruption campaign, slowing economic growth and tightening credit on the mainland. Steve Vickers Associates, corporate risk assessment specialists in Hong Kong, highlights gaming among sectors most impacted by the anti-corruption drive. Larger issues, such as greater anti-money laundering scrutiny globally, also matter. Lengthening collection times for creditors are calling into question the basic premises of the Macau VIP model, and smaller junkets are slimming down their operations.