how big is the Macau gambling market? …potential?

…a lot depends on how you measure.

the Nevada comparison

Let’s compare Macau with Las Vegas.

According to the Nevada State Gaming Control Board, during the three months ending February 29th (the latest figures available as I’m writing this) the Las Vegas strip casinos had revenue of $1.67 billion.  The downtown area of Las Vegas added about a tenth to that.

During the same three months, according to the Macau Gaming Inspection and Coordination Bureau, Macau casinos took in MOP 72.9 billion, which translates into US$9.1 billion.

On this measure, then, the Macau market is 5x the size of Las Vegas.

gross revenue vs. net

That’s not the whole story, however.

The official figures don’t report the total amounts that are being bet in the market.  Instead, they record the net amount that the casinos win from customers during the period..  The amounts bet are much larger.

We have precise figures for Las Vegas.  On average, gamblers lost 9.6% of the amounts they bet in Las Vegas during December, January and February.  So they actually bet $17.4 billion during that period.

We don’t have comparable official numbers for Macau.  So we have to estimate.  Conveniently, though, virtually the only game played in the SAR at present is high-stakes baccarat, where casino win typically ranges from 2.7% to 3.0% of the money bet.  To err on the conservative side, let’s say that the win over the winter for the Macau market was impossibly high at 4%.  Using that percentage will give us a low-ball figure for total wagers.

In Macau gamblers actually bet $228 billion during the three months.  On this measure, Macau is already 12x the size of Las Vegas.


When I began following casino stocks in the early 1980s, casino operators regarded hotels, restaurants and shopping as regrettable necessities (cost centers, in accounting jargon).  They basically gave the food away to draw patronage.  And the more spartan the room, the better.  That way gamblers spent the maximum amount of time in the casinos and not lounging around watching TV.

Since then the Las Vegas industry has been transformed–with a large assist from Steve Wynn and Sheldon Adelson–into a resort destination.  Prior to the Great Recession (and the accompanying Great Overbuilding), non-casino operations in Las Vegas made up about half the total revenue–and about an equal amount of profit.  In other words, by developing Las Vegas as a resort/convention center, the casinos doubled the size of their market.  This is the model Macau wants to copy.

My guess is that, at present non-casino revenue is only about 15% the size of casino win in Macau.  So the nascent resort business in Macau could, if it’s successful in emulating Las Vegas, be at least 3x the current size.  That would mean that–even without market growth–visitors to Macau could be spending half a trillion dollars a quarter and company profits could be close to 2x the current level.

The Financial Times just wrote a good summary of the current supply constrained situation in the SAR.

but there’s more

In its latest quarterly reporting to shareholders, LVS included in its packet of earnings presentation slides an appendix that touches on growth potential for the Macau market.

–Slide 21 illustrates the proposed high-speed rail system that will connect all the major cities, including Macau, in eastern and central China.

–The more interesting slide is #22, which breaks out recent visitors to Macau by domicile.  It shows that 72% come from nearby Guangdong province, an area with a population of 95 million.  Hunan and Chongqing provinces, which together also have a population of 95 million, but which are somewhat farther away, represent less than 7% of visitors so far.   But that number is starting to grow at a much faster than 50% annual clip.  This implies, I think, that the Macau casino market has come nowhere close to tapping its entire Chinese potential.

Macau gambling: leading indicator for China?

yesterday’s Hong Kong trading

In Hong Kong trading Tuesday, the major Macau gambling stocks moved sharply upward.  Wynn Macau, a recent market laggard, was the star, gaining 8.6%.  But even China Sands, which is up by over 40% since the Hang Seng peaked last August, rose by almost 6%.


the Karen Tang effect

According to Bloomberg, Karen Tang, a prominent Hong Kong-based leisure analyst who works at Deutsche Bank, reversed her relatively negative view on casinos in the SAR after meeting with company managements.

Ms. Tang sent these same stocks into a tailspin last August.  That’s when she issued a report arguing that a falloff in demand for high-end luxury cars that was then being experienced in China presaged an almost complete evaporation of growth in the VIP baccarat market in Macau.  Since high-stakes baccarat is the mainstay of the casinos there, this was an especially dire forecast.

Her idea was that the market would begin to slow in the autumn.  Economizing high rollers would make trips already planned–and possibly paid for–but wouldn’t book further visits.  The market wouldn’t contract.  But growth would nosedive, troughing late in the first half of 2012 at a year-on-year rate of, say, +15%, before beginning to rebound.

too pessimistic

I didn’t see the Tang report.  But it was extensively covered in the Asian press.  From those accounts, it seemed the evidence was flimsy and the conclusion much too pessimistic.  As it turns out, Ms. Tang was wrong.  That’s not the important thing (although I’ve been unable to refrain from inserting this conclusion in this post).

rebound already!

What is important is that after a mild slowdown to a “mere” 25% growth rate last December, Chinese high roller gambling in Macau is beginning to accelerate again.  That’s what Ms.Tang found out on her research trip to Macau and published in a note yesterday.

While I was looking at yesterday’s stock prices in Hong Kong while writing this post, I noticed an article from  It reports the results of a research trip to Macau by a Citibank (never to be mistaken for a research powerhouse) analyst, who says the casinos indicate gambling in the SAR grew by about 40% year on year during the first 11 days of March. That’s substantially ahead of the 28% year on year growth of the market during January-February.  And it’s not that far below the 42% gain the market put up for full-year 2011.

According to Forbes, Nomura Securities (which makes Citi look good) thinks March gaming win will be up by about the same rate as the average of January/February (a two month average corrects for variable timing of the New Year holiday).

The bottom line, though, is that the market is a lot better than the consensus had thought–and is looking up.

stock market implications

casino stocks?…

Given all the lawsuits flying around, this may not be the time to load up on the Las Vegas gambling companies.  Personally, the litigation bothers me enough that I won’t buy more, but not enough to sell what I have.  It seems to me that the Macau subsidiaries are relatively insulated.  I like Steve Wynn.  And Las Vegas Sands is still cheap.

…or indirect plays?

The most important aspect of yesterday’s trading may be the signal that corporate magnates in China are starting to feel a lot better about themselves and their businesses.  The safer way to go is probably to look for sold-off US firms that have a lot of Chinese exposure.

Macau gambling market results for November 2011: has a slowdown begun? …does it matter?

the Tang report’s conclusion

Macau gaming stocks began a late-August swoon when Karen Tang of Deutsche Bank, an influential securities analyst in the Hong Kong market, published a report on the casino stocks there.  In it, she predicted that a sharp and protracted slowdown in spending by high-rollers in the Macau gambling market would soon begin.  According to Reuters, she said that revenue growth would slow to +34% year on year in October 2011, +32% in November and +20% in December. Growth might shrink to as little as +10% during 2012.

her reasoning?

Affluent Chinese were no longer spending on European-made luxury cars.  She and the DB economics department felt that this was the harbinger of a widespread pullback in consumption by the wealthy.  Finally, they thought, the affluent were succumbing to the Beijing government’s attempts to rein in economic growth on the mainland.

does the argument make sense? 

In my opinion, no.   There’s been no sign of falloff in any other area of Chinese luxury spending.  Maybe the new cars were ugly, or the potential buyers had no garage space left.  I’m not saying that Chinese gamblers aren’t going to spend less in Macau in the coming months.  That could happen.  I’m only observing that I don’t think the luxury car situation is evidence in favor of this conclusion.

I think Ms. Tang would have been better off arguing that the Macau casino stocks were fully priced for the best possible outcome and therefore had no near-term upside.  That would mean that they could only go sideways or down–reason enough to take some profit in the sector.

Nevertheless, the Tang report was enough to drive the sector down very sharply in late August and throughout September.  At one point, some stocks had lost close to half their value before beginning to rebound.  …and then the Europe-related selling began.

what does all this mean for us today?

Well, the November Macau gambling market results were posted on the website of the Macau Gaming Inspection and Coordination Bureau on the afternoon of December 1st.  Here they are:

Monthly Gross Revenue from Games of Fortune in 2011 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%
Sept 21,244 15,302 +38.8% 194,350 133,237 +45.9%
Oct 26,851 18,869 +42.3% 221,200 152,106 +45.4%
Nov 23,058 17,354 +32.9% 244,258 169,460 +44.1%

Source: Macau DICJ

As you can see from the bold figures, after being wildly wrong about October growth prospects, Ms. Tang seems to have predicted the November results reasonably accurately.

Is there any significance to the November prediction?  My guess is that there isn’t much meaning for the stock market, even if this turns out to be more than a lucky guess.  For one thing, the stocks are much cheaper today than they were when the original report came out.  For another, Beijing has just publicly signaled that it is reversing its money policy to favor GDP growth.  So stocks should now be beginning to discount a reacceleration of the gambling business in Macau–not a slowdown.

It will be interesting to see how the Hong Kong market evaluates this situation.  My hunch is that the mid-November lows will hold, but that the market will want to see at least the December market results before becoming more bullish.

Macau gambling: July 2011 results; longer-term outlook

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
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%

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.