The Macau gambling market: September 2010 results

The Gaming Inspection, and Coordination Bureau of Macau, the casino regulator in the SAR, posts total market casino win statistics monthly on its website.

The 2010 figures, year to date, along with comparisons with the comparable periods of 2009, are as follows:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2009 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2010 2009 Variance 2010 2009 Variance
Jan 13,937 8,575 62.5% 13,937 8,575 62.5%
Feb 13,445 7,912 69.9% 27,383 16,488 66.1%
Mar 13,569 9,531 42.4% 40,951 26,019 57.4%
Apr 14,186 8,340 70.1% 55,137 34,359 60.5%
May 17,075 8,799 94.1% 72,211 43,158 67.3%
Jun 13,642 8,269 65.0% 85,853 51,427 66.9%
Jul 16,310 9,570 70.4% 102,163 60,997 67.5%
Aug 15,773 11,268 40.0% 117,935 72,265 63.2%
Sept 15,302 10,943 39.8% 133,237 83,208 60.1%

Source:  Gaming Coordination and Inspection Bureau, Macau SAR

The pataca is worth about US$0.125.  So the market win in September is about US$1.9 billion.

To me, the most interesting aspect of the report is how quickly Wall Street picked up on it.  The figures were posted on the GCIB website at around 7am, New York time, on Monday.  Yet, the strong positive response to the figures in New York trading could be seen in the stock prices of the US firms with Macau interests–WYNN, LVS and MGM–from the opening bell.  US gaming analysts’ reports (I’ve only seen abstracts on the internet) commenting on the figures were apparently circulating among professional investors earlier than that.

the September figures

They’re really good.  That’s the bottom line.  Beyond that, the statistics aren’t completely straightforward.

Year over year comparisons are affected by the financial crisis, which severely reduced casino patronage in the first half of last year.  The market was still up for 2009, but only by about 10% vs. 2008.  If we look at the two-year growth rate for the market, as a way of offsetting some of the recession distortion, the advance comes in at a heady 30% annual rate.  That’s probably a better indicator of the market’s expansion than the 60%+ growth some first-half 2010 months showed.

In addition to the recession, government regulation has had an effect on the longer-term growth figures as well.  For one thing, it’s much easier today than it was a couple of years ago for a Chinese citizen to get a government ok to visit Macau.  For another, the SAR has stepped in over the past couple of years to slow down capacity expansion, capping the installation of new table games in Macau to an extra 10% in total.  And it intervened early in a potentially profit-devastating price war over VIP junkets, setting a ceiling on the incentive fees a casino could pay to organizers for steering clients their way.

The result of government policy, both the mainland and Macau, has generally been to slow revenue growth, meaning that above-average growth will continue for longer, but to ensure better profit performance.

where to from here?

One of the beauties of the casino business is that it’s relatively simple to analyze.  If we assume that the share of their income that gamblers wager in casinos is relatively fixed, then market revenue growth should be a function of expansion of nominal GDP and of growth in the number of gamblers.  In a mature market, the growth in gamblers is simply a function of the growth in the working population.

For Macao, the predominant source of gamblers is the mainland, at about 50%, followed by Hong Kong at around 25%.  Let’s say that nominal GDP will expand at around a 10% rate for the next few years in both places.  Put working population growth at 1%.  This would mean that in a mature state, Macau gaming revenues would rise by about 12% annually.

But the number of visitors to Macau is rising at close to a 20% annual rate, indicating that there are still gamblers, especially in China, who are potential Macau customers but who have yet to visit.  How long can this rapid annual increase in visitors go on?  That’s the big question for this market.

The short answer is there’s no way to tell.  We can try to extrapolate from experience in the US in Las Vegas.  The worry is that the size and structure of the US and Chinese economies is so different.  But here’s my guess:

Let’s say half the population of the US is affluent enough to afford to gamble in Las Vegas.  That would be 140 million people.  About 36 million, or about a quarter of the total, visited Las Vegas last year.  If we say that 10% of the population of China is affluent enough to gamble in Macau, that would be a potential market of about 130 million.  Of that number, about 10 million, or 7.7% of the total, are likely to visit Macau this year.

So, if mainland Chinese had the same propensity to gamble as Americans, then there are about another 20-25 million potential customers on the mainland yet to be tapped.

Even if that number is twice the real size, that would mean that mainland visitation to Macau could double from the current level, which could add 10% to the annual growth rate of casino revenues for the next seven or eight years.

signs capacity is getting tighter

We’ll know more when LVS, WYNN and MGM report September quarter earnings, but I’ve heard reports that hotel rooms are becoming harder to find between now and the end of the calendar year.  If true, that would be god for the non-casino side of the Macau businesses run by Americans.  The casinos might benefit as well, since an excess of patrons in a static capacity environment means table stakes may rise–leading by itself to a revenue boost.

lots of stock choices

So far, a quickly rising tide has supported all casino boats, year-to-date at least.  More than doubling, the Hong Kong-controlled companies have been the best performers.  Foreign-controlled firms have made about half those gains.

To me, the most basic questions are:

–do you want an American company trying to being Las Vegas-style gaming to Macau?  Americans think this is superior technology; Hong Kong investors, so far, see strangers who don’t know the market that well.  Hong Kong’s Disneyland probably didn’t help the Americans’ cause.

–do you want the baggage the Ho family brings with it?  Again, so far, this has been no problem for Hong Kong investors, although it has always been one for me.

My answers:  stick with either Wynn Macau or Sands China, or their US parents.

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