The day before yesterday, the Macau Gaming Inspection and Coordination Bureau (DICJ) posted the total monthly gambling “win” (the amount lost by gamblers) for the SAR’s casinos during May. The results were below analysts’ expectations, causing a selloff in the US gambling stocks with Macau presence, and a minor negative ripple in the Hong Kong-traded Macau casino stocks themselves.
The year-to-date DICJ results are:
| Monthly Gross Revenue from Games of Fortune in 2014 and 2013 | ||||||||||
| Monthly Gross Revenue | Accumulated Gross Revenue | |||||||||
| 2014 | 2013 | Variance | 2014 | 2013 | Variance | |||||
| Jan | 28,739 | 26,864 | +7.0% | 28,739 | 26,864 | +7.0% | ||||
| Feb | 38,007 | 27,084 | +40.3% | 66,746 | 53,948 | +23.7% | ||||
| Mar | 35,453 | 31,336 | +13.1% | 102,199 | 85,284 | +19.8% | ||||
| Apr | 31,318 | 28,305 | +10.6% | 133,517 | 113,589 | +17.5% | ||||
| May | 32,354 | 29,589 | +9.3% | 165,871 | 143,178 | +15.8% | ||||
Source: Macau Gaming Inspection and Coordination Bureau
What’s going on?
First of all, and least important, the market had been expecting a 10%+ year-on-year gain in aggregate casino win, based on weekly reports of business results provided by the casinos. The falloff during the last few days of the month is most likely a random variation in the casino luck factor, one that will eventually be reversed.
More generally, the so-so rate of yoy gain in win is the result of two opposing factors. On the one hand, increases is betting by mainland high-rollers, the almost exclusive focus of the Macau market over the past decade, have slowed to a crawl. On the other, affluent mass-market gambling is rising sharply. Mass market gamblers bet smaller amounts, but lose a much higher percentage of the amount bet than VIPs (who are more or less professional gamblers). Mass market patrons want entertainment, not necessarily gambling profits, so they don’t watch what they’re doing so closely. They also spend a lot more on things like restaurants, shows and shopping. We’ll know more about non-gambling when June financial reports are released by the casinos, but non-gambling profits have been rising sharply from a small base. It’s important to remember that in the salad days of Las Vegas, non-gambling amounted to half of casino industry profits. So growth in Macau has potentially a long way to grow.
The overall Macau market is facing capacity constraints that will only begin to easy next year. In a sense, the current lull in new capacity additions is ending up being luckily timed, since it coincides with a slowdown in the VIP market.
All in all, it seems to me that the March-May gains in casino win are more indicative of what the rest of the year will be like than January-February.
The related stocks have sold off by about 20%–more than I would have expected–in a flat Hong Kong market over the past few months. Stocks like Sands China and Galaxy Entertainment, which have little VIP exposure and lots of mass market, have declined at least as much as Wynn Macau, which is in the opposite position.
I find the Macau stocks hard to figure out. It’s not their profit potential, it’s the way they trade in the Hong Kong market. The current situation of little capacity addition was well-known a year ago. The VIP slowdown could equally well have been anticipated. I think the mass market and non-gambling profit development has been much more positive this year than the consensus expected. In other words, the negatives are no worse, and the positives are a lot better. Yet the stocks went up last year and have sold off so far in 2014.
My take? I’m in this for the long haul. I sold my Wynn Macau quite a while ago and have been looking for a reentry point. Not yet, though. I continue to own Galaxy Entertainment and would own Sands China as well, if it were easier for a US citizen to buy. I’m looking to add to my holdings, but am in no rush.