After overtaking Las Vegas as the world's gambling hub, Macau's growth has been so formidable over the last few years that it is now pulling in seven times as much money as Vegas. Over the last few quarters, however, growth has been slowing down significantly for companies like Sands China (NYSE:LVS) and Galaxy Entertainment (OTCQB:GLXZ), leading commentators to question the state of Macau's economy. As a prime example of China's 'one country, two systems' credo, Macau's predicament highlights certain macro-economic and regulatory issues as China moves into what many analysts call the 'new normal'.
The latest read on the state of Macau's gaming industry was once again worrying, although this one was particularly bad. Revenue for November fell nearly 20% year-over-year to around $3.03 billion, more or less in line with estimates, for the worst read since September 2012. Year-to-date, the industry managed to eke out a gain of 0.3%, but in all likelihood, the area is heading for its first annual decline since liberalization began.
In any case, the industry isn't getting much analyst love lately. ABN Amro and Macquarie have both chimed in with a negative outlook for Macau's gambling industry, citing a mainland anti-corruption drive, visa restrictions and a smoking ban in the area as continuing headwinds for the region. Nomura was even more bearish, forecasting a drop of at least 3% next year. According to a Bloomberg survey, revenue might dip by up to 0.6% for this year. Wells Fargo too sees no end in sight to the pain.
Highly reliant on its backyard market of mainland China, any downturns in the region hit Macau hard and quickly. With China facing its slowest pace of growth since 1990, wealthy consumers are less willing to roll the dice. Union Gaming Research Macau sees December gaming revenue declining by some 25% year-over-year, as China's economy continues to slow down. According to macro commentators, the recent rate cut signals a move towards a looser monetary policy.
Perhaps even more problematic than weak economic growth in greater China, a government crackdown on corruption in Macau is hurting revenue. A slew of arrests of high-profile Chinese officials is affecting the VIP segment upon which Macau is generally very reliant. At the same time, President Xi Jingping has urged Macau politicians to diversify their economy away from gambling.
The new normal?
All this has led to the question whether Macau is facing a temporary slump or whether this anemic growth is the new normal in the world's gambling capital. As usual, the answer is somewhere in between. Indeed, the times of easy money may be over, and we will probably not return to the nearly effortless high-double digit revenue growth figures in the area. However, there are several reasons to be bullish on the industry in the long term.
First of all, Macau is the only place where you can legally gamble in China, and Chinese people on the whole are not at all averse to a bit of gambling from time to time. With a steadily increasing number of high-net-worth individuals, gambling demand should continue to increase. Also, Macau is at the moment not offering much in the way of entertainment, certainly not on the scale of Las Vegas, which is another area in which it can grow.
Secondly, valuations are relatively low at the moment, with most of the major casino operators in the area trading at under 16 times trailing earnings. Moreover, the planned opening of the Parisian Macau is seen as a potentially significant boost to the area's revenue stream by increasing capacity and providing increased exposure for the Sands' operations.
Still, it seems unlikely that the industry will be able to return to its growth rate of the last five years. This isn't such a surprising thing, as the soon to be world's largest economy is seeing a normalization of economic growth which so far seems to be a soft landing.
After a spectacular run over the last years, growth finally seems to be drying up in Macau, the world's main gambling destination. There are several causes for this, including weaker growth in China, government crackdowns on corruption and visa restrictions. As such, it looks like the new normal may be more tempered revenue growth. For the patient investor, there are several reasons to be bullish on the industry. However, it would be wise to wait for evidence of renewed growth before getting in.
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