Category Archives: China

how mature is the Macau gambling market today?

November 9, 2012 By in Asian economic development, Casinos, China, Current Market Thoughts, Entertainment, Industry Analysis Tags: , , , , , , , , , Leave a comment

A Hurricane Sandy note:  Still no internet at home–no sign of Comcast, either.  I’ve been using my phone as a mobile hot spot, but today Verizon failed as well.  Hence the late post.

maturing?

We have some indirect evidence from the recent actions of the Macau government, which has been especially careful to pace growth of casino operations in the SAR in order to avoid overcapacity.  The authorities have approved a total of five big new casino development plans for the Cotai area, with completion scheduled over the next three-five years.  That’s on top of projects already under way.  But although I think trust in the good sense of the government is justified by its behavior over the past decade, that’s a particularly slim reed to depend on in making an investment.

…not so much

a.  visitation

Luckily, there’s a substantial amount of tourist data compiled by the Macau Statistics and Census Service available to us.  The information below summarizing the casino penetration of various Chinese provinces is MSCS data that I’ve taken from the 3Q12 Las Vegas Sands quarterly earnings report.  I’ve reorganized the presentation a bit.

Over the 12 months ending September 30th,  11 million visitors came to the SAR from other parts of China.  Let’s assume they all came to gamble.

Guangdong:  Of that number, 8.1 million, or 74% came from neighboring Guangdong province.  Guangdong has a population of 104 million, so the number of visitors (I don’t think it matters that many people will have come more than once) equals 8% of the population.  The number of visitors from Guangdong grew over the past year, but by only 4%.

the rest:  Macau also draws from other provinces in eastern China, whose population totals 262 million, or 2.5x that of Guangdong. The number of visitors from those provinces last year amounted to 1.1% of their populations.  The visits break out as follows:

Hunan, 66 million people, 596,000 visits, 27% year on year growth

Zhejiang, 54 million people, 608,000 visits, 11% yoy growth

Fujian, 37 million people, 877,000 visits, 4% growth

Chongqing, 29 million people, 201,000 visits, 36% yoy growth

Shanghai, 23 million people, 422,000 visits, 11% yoy growth

Beijing, 20 million people, 426,000 visits, 14% yoy growth

Tianjin, 13 million people, 130,000 visits, 47% yoy growth.

The province that jumps out at me is Fujian, just to the northeast of Guangdong.  It seems to be showing the same flattening out of visitor growth seen with Guangdong, but at a visitation level  = 3% of the population vs. 8% in Guangdong.

If we think that the non-Guangdong provinces listed above will reach maturity at the Fujian level of 3%, then those provinces will yield another 5 million or so visitors over the next few years before growth flattens out.  That would imply close to 50% growth in visitors for the Macau gambling market before the industry would need to look to the other 2/3 of China for growth.

If we thought that Fujian is outlier of some sort, and Guangdong is a better model, then the non-Guangdong provinces could yield up another 17-18 million visitors, almost tripling the current size before the casinos have to look for new gamblers in the 2/3 of China Macau doesn’t yet service.

As with most things, the truth of the matter is probably somewhere in the middle.

One other note about the visitor numbers.  To some degree, the number of gamblers who come to Macau is a function of the amount of casino space available for them to use.  Until the past six months, the market seems to me to have been capacity constrained.  If so, the visitation numbers and growth rates we’re using could be uncharacteristically low.

In addition, the 12 months ending in September represent the worst period of the current post-Great Recession slowdown–another reason to think that the current visitation numbers represent less than the growth the market will see in coming years.

b. spending

Market revenue growth is a function of both the number of gamblers and of the amounts that they bet.  Growth in visitors over the past year was just under 5%.  But the amount won by the casinos over the same period was up about 15%, implying the average visitor bet 10% more than in the prior year.

In my experience, this makes sense.  The average amount bet in a given market rises in line with nominal GDP.  There’s no reason this should change.

c. adding a + b

If the number of visitors rises by 5% per year on average and the amount spent goes up by 10%, then the Macau market will experience 15% annual revenue growth.  If so, five years from now the number of visitors will still represent much less than 3% penetration of the six non-Guangdong, non-Fujian markets listed above.  And gambling revenue in the SAR will have doubled in size.  I think that’s a bare minimum.

China in 2013

October 23, 2012 By in Asian economic development, China, Current Market Thoughts, economics, Hong Kong, Japanese development, Portfolio management, Securities regulation, Strategy Tags: , , , , , , Leave a comment

leadership change

China is currently in the process of its once a decade change in the top leadership of the Communist Party.  Official nominees for the highest posts will be officially announced in about two weeks.  They’ll be ratified in a pro forma vote next March.

New leaders often mean new policy directions.  While the old leaders are on the way out and the new ones are waiting to be anointed, the most prudent stance for lower-level Party functionaries (read: basically everyone) is to do as little as possible that could conceivably be second-guessed later on.

During the six- or nine-month transition period, the Chinese economy slows.  It reaccelerates as new leaders clarify what their priorities are.

I expect the same will happen this time around.  But as I try to imagine what I would do if I were running China, I’m beginning to think that the character of China’s growth from this point on may differ substantially from what it has been to date.

How so?

is the developing country growth model broken?

The standard developing country growth model that helped the EU and Japan recover after WWII and which has been duplicated by every successful emerging economy since, is broken.

The model, which I’ve written about extensively, has two parts:

1.  gear your economy toward exporting to the huge, healthy, fast-growing US, and to a lesser extent the EU, and

2. peg your currency to the US$ so foreign exchange movements won’t erode your labor cost advantage.

The breakdown has come in both areas:

1.  aging of the Baby Boom is reducing the long-term growth rate of the US to around 2%.  The need to repay immense government debt suggests to me that 2% will be a ceiling over the next few years, not a floor.  And the EU, China’s largest export market, probably won’t show much life for the next half-decade.

2.  keeping the currency peg means more or less mirroring US monetary policy, which is now calibrated for an economy in intensive care, not one in full bloom.  Keeping the local currency in sync implies maintaining domestic monetary policy that’s much too loose.

In addition to this, there are signs in China that, at least on the more heavily industrialized east coast, it is running out of the cheap labor needed to fuel the export-oriented development model.

reorienting growth

For all these reasons, I think the new Chinese leadership is going to make a substantial effort to re-orient growth away from exports to the US and EU (where there’s little growth to be had).   Exports will continue to go to other developing nations.

The two other areas for development are the domestic service economy and higher value-added manufacturing.  In free-market economies, forces of the status quo (labor-intensive exports) typically use their substantial political clout to stifle progress here.  And there are certain to be similar efforts made in China.  But Party control of the Chinese economy suggests the status quo will be less successful.

investment implications

If this shift in priorities is underway, and is successful, the biggest winners will be suppliers of products and service for average Chinese consumers. Luxury goods will continue to do well, I think, but mass-market products will do better.  The trick will be finding ways to play them.

On the other hand, suppliers of export-oriented industrial machinery–to some degree domestic, principally overseas-based–to Chinese firms seem to me to potentially be the biggest losers.  (We may already be seeing this phenomenon in 3Q12 earnings results and in management guidance.

Macau casino gaming, September 2012

October 16, 2012 By in Asian economic development, Casinos, China, Current Market Thoughts, economics, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , 1 Comment

September gambling results

Earlier this month, the Macau government’s Gaming Inspection and Coordination Bureau released its monthly report of gaming “win” for the SAR’s casino industry.  The figures are as follows:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2012 and 2011
Monthly Gross Revenue Accumulated Gross Revenue
2012 2011 Variance 2012 2011 Variance
Jan 25,040 18,571 +34.8% 25,040 18,571 +34.8%
Feb 24,286 19,863 +22.3% 49,325 38,434 +28.3%
Mar 24,989 20,087 +24.4% 74,314 58,521 +27.0%
Apr 25,003 20,507 +21.9% 99,317 79,028 +25.7%
May 26,078 24,306 +7.3% 125,395 103,334 +21.3%
Jun 23,334 20,792 +12.2% 148,729 124,126 +19.8%
Jul 24,579 24,212 +1.5% 173,308 148,337 +16.8%
Aug 26,136 24,769 +5.5% 199,444 173,106 +15.2%
Sept 23,866 21,244 +12.3% 223,310 194,350 +14.9%

Source: Macau DICJ

Initially the Hong Kong stock market took the September figure of 23.9 billion patacas (US$3.1 billion) as disappointing.  For reasons best known to themselves, the consensus of Hong Kong gambling industry analysts had been that revenue should be up by 17% (I have no idea why they were so bullish).  As a result, on the day of the report the stocks all sold off.  But they rallied back the next day, as the market began to look at the accelerating pattern the year to year comparisons appear to be establishing over the past three months.

October as a key

October, which contains Golden Week–normally the period of the highest demand for gaming during the year–will be important to monitor.

October 2011 gaming win was 26.9 billion patacas, a 26% month on month increase over normally weak September.  I would take a gain of 15%+ for October this year as a signal that the market has already hit bottom and is on the mend.

an important time

In my view, the Macau gaming market is at a crucial juncture, one that participants in capital-intensive industries dread.  Casino capacity has expanded to the point where it, at least temporarily, outstrips demand.  How so?  A number of big new casino projects, started several years ago, have been coming on-line just as economic slowdown in China is putting a crimp on high rollers’ desire to gamble.

I think the casino operators and the Macau government have been reacting to the situation in an unusually sensible way.  New casino approvals have dried up.  Operators have been stretching out the timetables for already initiated projects–Sands China, for example, has already paid a penalty to the government so it can postpone by a year the opening of its latest Cotai expansion.  At the same time, casino companies have used the current period of extraordinarily low interest rates to lock in their project financing on favorable terms.

It seems to me, therefore, that intra-industry dynamics are not the big worry they would be in, say, the cement or paper or high-rise building construction.  The most important steps to stimulate global economic recovery are already being taken.  So holders of Macau casino stocks (like me) are simply waiting for evidence that will show the timing of the market’s rebound.

My thought has been that a significant pickup in demand will be a 2013 phenomenon, not a 2012 one.  I’m not yet willing to act, but the pattern of recent yoy market win comparisons suggests to me I may be being too pessimistic.

Japan joins the QE party

September 20, 2012 By in Asian economic development, China, Current Market Thoughts, economics, Japanese development Tags: , , , , , , , , Leave a comment

Japan’s QE

Two days ago, the Bank of Japan announced it is following the lead of the ECB and the Fed in launching a new round of Quantitative Easing (a term invented by an economist apparently obsessed with the Queen Elizabeth line of ships).

the EU starts, the US follows

The rationale for the European Central Bank to act is clear.  It is in effect using funds from the stronger EU economies to prop up the bond markets of debt-laden and uncompetitive Spain and Italy while they restructure their economies.

Why QE3 in the US is somewhat less clear.  The Fed is propping up the domestic mortgage-backed securities market, while simultaneously assuring investors that short-term interest rates will remain low for the next three years.   This will certainly be good for housing prices.  Addressing the looming “fiscal cliff,” or, better still, reforming the tax code would be much more effective confidence-building steps.  But these are the province of the White House and Congress.  QE3 is all the Fed can do.

The Fed’s intent is to create more jobs.  These might come either in direct fashion from a new residential construction boom (which wouldn’t be a good thing, in my view), or indirectly from the “feel-good” factor that stable or rising home values would produce.

The Fed realizes its action may do nothing.  But its attitude seems to be that it’s better to light one more candle than to stand by and watch the labor force erode through chronic unemployment (see my post).

Japan’s motivation

Japan’s motivation is murkier still.  If EU and US money policy become looser, then simply by doing nothing Japan’s becomes relatively tighter.  This change won’t make itself felt through lower nominal interest rates, which are close to zero anyway.  But the new tightness should manifest itself in relative strength for the ¥ versus the € and the $.

So far, however, that hasn’t happened.  The ¥ has weakened against its strongest trading rival, the €, and strengthened only mildly against the $.  Nevertheless, the Bank of Japan appears to have chosen to draw a line in the sand for its currency at the level of $1 =¥78.  It’s doing so to assist domestic export-oriented industry.

Yet, the central bank must know that such currency defenses seldom, if ever, work.  And it must realize that currency strength isn’t the main problem. Rather, the Japan Business Association (Keidanren) is lost is dreams of the glory days of a quarter-century ago.  Ex the big auto manufacturers, Japanese exporters haven’t evolved since then.  In newer areas, they have been surpassed by the US, in older sectors by Korea and China.

the essential differences

The ECB is acting because it sees no other choice if it wants to preserve the Eurozone.

The Fed thinks there’s little downside to its actions, and they may do some good.

Both central banks are seeking to stimulate their domestic economies.

Japan, on the other hand, is trying to defend its trade position.  And it’s “buying time” for adjustment for a sector that hasn’t changed in 25 years.  Not a great way to make a living.

From an investment perspective, even though the motivations of the various central banks may be different, the overall effect is that more money is sloshing around looking for a home.  In the near term at least, that’s good for global stock markets.