the Lex column on Macau gambling

The Lex column of the Financial Times is noted for its pithy–and very accurate–assessments of current economic or financial matters.  In its commentary about the Macau gambling market a couple of days ago, however, I think Lex has made a rare miss.  In particular:

–the column does note that the advent of casino gambling in Singapore has not diverted business from Macau.  On the other hand, there’s no reason it should be.  Singapore has only two casinos.  Of them, one is oriented toward the mass market, leaving a single venue–run by LVS–catering to the high-roller baccarat players Macau specializes in.  LVS has little incentive to market Singapore to its Macau clientele.  Past evidence in Las Vegas suggests that offering multiple venues to big customers doesn’t increase the portion of their business that a casino company gets.  It just runs up costs.  (In any event, to my mind, if LVS were to sell another location, conflict of interest  worries aside, it would more likely be ailing Ls Vegas).

Also, the Macau market is closely linked with junket operators, who help collect markers in mainland China.  Singapore is not a fan, and has already barred some from the island’s gambling palaces.

–Lex also worries about overexpansion of the type that is now plaguing Las Vegas.  But Macau appears to have absorbed that lesson as well.  The government has made it plain that it wants every operator in the market to be profitable.  It stepped in a couple of years ago to set maximum levels of compensation to junket operators (the key metric for profits in the high roller market) when weaker casinos seemed bent on starting a price war.  There’s also a cap on the total number of table games allowed in the market.  The government controls the supply of construction labor carefully.  And it has already turned down LVS’s request to begin building on a site where the company had spent $100 million on preparation work–presumably because it was concerned about the rate of floor space additions.

–the column is, as usual, a bit vague about investment advice.  It suggests that in a time of excess capacity (which I think is unlikely anytime soon) one should buy the stocks of firms that are growing at above average rates but trading at below the sector multiple.  If only it were that easy.  All the firms now public are family-controlled enterprises (although as/when MGM goes public, that may change).  In my view, they are all tigers who are unlikely to change their stripes.  If so, market laggards are likely to stay that way-with lower growth rates and lower PEs.  Aside from the “usual” problems of working for a family-owned firm, competent international casino executives may be hesitant to risk the reputational damage that may go along with working for a firm that has encountered regulatory problems elsewhere in the world. My guess is that this is a market where turnarounds won’t happen.

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