July 2011 results
For Macau, it was business as usual in July–another huge, and surprisingly strong, year on year increase in casino win from gamblers in the SAR. Here are the numbers from the Macau Gaming Coordination and Inspection Bureau:
* 1 HKD = 1.03MOP (Unit:MOP million )
|Monthly Gross Revenue from Games of Fortune in 2011 and 2010|
|Monthly Gross Revenue||Accumulated Gross Revenue|
source: Macau Gaming Coordination and Inspection Bureau
To me, the interesting thing about these figures is that the year on year market gains seem to be accelerating over the past two months. Hong Kong investors, however, continue to fret about the possibility that withdrawal, underway for a considerable time already, of the countercyclical stimulus Beijing applied during the financial crisis in the West will stunt growth in Macau.
Macau Business magazine indicates, for what it’s worth, that Galaxy Entertainment continues to gain market share, as gamblers visit its recently opened Galaxy Macau casino in Cotai. Wynn Macau also appears to have been a relative winner.
the longer term
The most attractive aspect of the casino business for me as an investor is that it is relatively simple to analyze. Revenue growth under normal circumstances is a function of two variables:
–the growth in the amount of floor space in the market and
–the growth of nominal GDP ( or nominal disposable income, if you prefer) in the area the casinos’ customers come from.
The very strong market growth numbers in Macau indicate that conditions there aren’t “normal.” There’s still a substantial imbalance between the potential demand for gambling from China as a whole and the supply of casino space in Macau. Network effects are still at work increasing the number of gamblers able to afford a trip to Macau who want to go. Transport and border control bottlenecks still exist. Rapid economic expansion is also swelling the ranks of those who can afford Macau. I think we have at least several more years of this.
What happens when the imbalance is gone? Well, the main thing is that the 40%-50% growth rates disappear as well. From that point on, market growth becomes mostly a function of nominal GDP expansion. For China, that probably means 8% real growth plus 4% inflation, or about 12% annual growth in revenues. Operating leverage means that a 12% revenue increase will translate into 18% profit growth. In addition, the market will likely split into relative winners and relative losers. The former will grow profits at 20%, the latter at 15%.
It strikes me that the Hong Kong-listed casino companies are all currently priced as if the low end of the range will emerge as the norm almost immediately. I think that’s highly unlikely.