September 2014 for the Macau gambling industry

Yesterday in Macau, the SAR’s Gambling Coordination and Information Bureau (DICJ) released its monthly report of aggregate casino win (the amount gamblers lost in the casinos) for September.

The results were ugly.  The gambling industry as a whole took in MOP 25.6 billion (US$3.2 billion).  That’s an eye-popping amount  …but it’s 11.7% less than the SAR’s take during the same month last year.  September is also the fourth consecutive month of negative year-on-year comparisons.  To top the negative story off, the comparisons are getting progressively weaker.

The reason for the falloffs the in gambling in the SAR is an intensifying anti-corruption crackdown by Beijing, which has had Chinese high-roller gamblers trying to keep low profiles.  Some are doing their gambling in the Philippines, Singapore or Las Vegas; many are just staying home.

Despite this bad news, Macau casino stocks traded in Hong Kong rose by about 5% on the news.  Why?

–Analysts in Hong Kong have recently been falling all over themselves trying to be bearish, with the (typical) result that the actual numbers were better than the consensus had been predicting.

–The stocks are cheap.  They’re 40% – 50% below their peaks, with most now yielding more than 5%.

–The Macau gambling market is transitioning, thanks to the development of Cotai, away from being a destination only for the ultra-wealthy to a venue for the middle class.  Yes, the former gamble make much bigger wagers, but a casino may keep only 1.5% of the amount bet.  For the mass affluent, on the other hand, that percentage may be 15% – 20%.  In addition, middle class gamblers will also shop, eat out and go to shows.

–Comparisons should begin to improve next year.  New capacity catering to middle class gamblers will open; at some point, the renewed anticorruption campaign will have been going on for a year.  Assuming government efforts don’t intensify again, the yoy high-roller comparisons should stop deteriorating.  That would allow the middle class growth to begin to shine through in earnings.

I have no idea whether this is the absolute bottom for the Macau casino stocks or not.  But they look cheap to me.  I continue to think the long-term winners are the American-run casinos, especially Wynn Macau and Sands China.  I’ve been nibbling at both.  (An aside:  For a long while, I couldn’t buy Sands China through either Fidelity or Schwab.  Both had mistakenly classified the stock as a Reg S issue, which couldn’t be sold to Americans. At least with Fidelity, though, the problem has been fixed.)  The biggest loser will likely be the former monopoly operator, SJM.

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