Macau casinos, after their stock market decline

a weak few months

Macau casinos, and their foreign parents, have been bludgeoned in the stock market over the past couple of months.  Several reasons:

–general worry about stocks that had gone up a lot

–the Ukraine situation, which has unnerved European investors

–fear that the the current anti-corruption/anti-excessive consumption drive by Beijing will hurt the VIP business which has been the heart of Macau casino profits, and

–the possible proliferation of casino openings elsewhere in China, or in other Asian countries like the Philippines or Japan.

what, me worry?

Every portfolio investor acts on small amounts of imperfect information.  That’s why we don’t put all our eggs in one basket (Bernard Baruch to the contrary).   From where I sit, a lot of the negative things now being said about Macau seem to be (mistaken) attempts to explain the stock price drops.   I don’t think they have much factual basis.  Of course, even the best stock market investor is wrong 40%+ of the time.

For what it’s worth, here’s my take:

–So far there’s no hard evidence so far that Beijing’s anti-corruption campaign is having any negative effect on the VIP gambling business in Macau.

–More important, the Macau gambling market is no longer being driven solely by VIPs.  The new sweet spot is the mass affluent, a market segment that’s now the source of most of the SAR’s growth.  How so?  VIPs bet huge amounts, but they’re semi-professional gamblers.  They lose on average about 3% of the amount they bet; the casino rebates half of that, either to the high roller himself or to the middlemen who has brought him there.  So margins are razor-thin.  The mass affluent, on the other hand, are seeking entertainment.  At table games, they make much smaller bets, but they lose about a quarter of what they wager–and they don’t care that much.   A mass affluent pataca bet is worth 15x-20x in casino operating profit what a high roller pataca is.  Hordes of them are now descending on Macau.  (There’s also a shift among winners and losers within the market, but that’s another story.)

The mass affluent also want non-gambling entertainment.  In the salad days of Las Vegas, shows, concerts, restaurants…brought in just as much profit as the casino operations.  In Macau, this business is still in its infancy.  But I see no reason why Macau in the end will be any different.

–Transportation links are still being built to allow more far-flung areas of China to reach Macau, meaning market saturation is still years off.

–It makes no sense to me to believe both (1) that Beijing’s crackdown is aimed squarely at casinos and (2) that the government will give permission for more casinos to open in other areas of China.  But this is what some bears are saying.

–Macau has critical mass and lots of amenities.  Chinese is the dominant language.  Kidnapping high rollers isn’t an issue.  Japanese casinos, whatever they may eventually look like, are years away.  Singapore has already been up and running for a considerable while–and Chinese junket operators aren’t welcome there anyway.  Some VIPs will certainly try out the Philippines or other venues.  I just don’t see this as a big deal.

 

Yes, I trimmed my Macau exposure significantly last year–because my position size was much too large.   At this point, I’m a potential buyer, not a seller.

 

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