October Macau gambling results

Just at midnight, New York time, the Macau Gaming Coordination and Inspection Bureau (DICJ) posted its report of aggregate casino win for the SAR during October.  The win, that is, the amount gamblers lost in the SAR, was MOP 28.0 billion (US$3.5 billion).  That’s up by 9.8% month-on-month, but down 23.2% year-on-year.

The result had been widely anticipated–and heavily publicized by the companies themselves, the government of the SAR and Hong Kong-based securities analysts.  Consensus estimates of the decline seem to me to have centered around -21% yoy.

The Hong Kong casino stocks were up a couple of percent in midday trading today when the DICJ report appeared.  Despite the wide publicity, the stocks immediately lost all their morning gains.  They drifted lower throughout the afternoon, ending down by around 3% for the day.

How could  stocks drop 5% on news that had arguably so fully anticipated?

I don’t think it’s that win was down 23% instead of 21%.  Both are equally weak.  More likely, in my view, is that short-term traders used the DICJ report to take profits after the stocks’ 15% gains in recent weeks.  It’s also possible that the market hadn’t grasped the current Macau casino situation as fully as I had thought.  It could be, as well, that the discounting mechanism for stocks nowadays in Hong Kong works more like the bond market in the US (reacting to strongly to current news as it hits the media) than the stock market.  (I doubt this last, but it has been a while since I devoted a serious chunk of my time to studying the Hong Kong market.)

my take

I’m not in a huge rush to buy, partly because I already have a pretty full weighting, both through the Hong Kong stocks and through WYNN and LVS.

My working hypothesis is that cyclical lows–10%+ below today’s close–have already been made.

Could the stocks drop another 5% from here–i.e., get halfway back to the lows of September?   …maybe, especially since the market upturn I anticipate will likely be in the spring or summer of 2015.  But it would take at least that much to get me interested again.  For now, I’m content to watch.

the Macau gambling market contracted by 3.7% in June!

The recently released monthly report from Macau’s Gambling Information and Coordination Bureau (DICJ) showed that aggregate casino win (the amount gamblers lost in the casinos last month) amounted to MOP 27.2 billion, or about US$3.4 billion.  That’s a 3.7% year-on-year drop, the first red figure I can remember for the SAR, and the only one on the DICJ website, which contains comparisons going back to 2010.

Yes, the figures might have been slightly in the black if not for the World Cup keeping potential gamblers glued to their TV sets at home rather than being at the casino tables.  And it has been clear that the yoy comparisons would get progressively tougher as 2014 unfolded.  That’s because 2013 results got stronger as the VIP market returned to normal after the mainland Chinese Communist Party leadership transition.

There are two more important reasons for the flattening out of the Macau gambling market, however.  Both are temporary, I think.

–the continuing anti-corruption crackdown by Beijing, which has VIP gamblers adopting a lower profile, and

–lack of junket operator credit (junket operators typically borrow, at rates of 1%+ per month, funds that they advance to VIPs), in the wake of the apparent disappearance of a prominent organizer with US$1 billion – US$1.3 billion of his company’s funds.  This has understandably made lenders reluctant to back any junket operator as fully as before.

Interestingly, the Macau gambling stocks, which have been very weak performers since early this year, rallied on the DICJ report.

What to do?

My guess is that the VIP segment of the Macau market will be at best flat for the rest of the year. That will make it hard for the aggregate gambling market in the SAR to show significant advances.  However, the real story of Macau is below the surface.  It’s the rapid shift away from VIPs and toward the mass affluent that’s now going on.  The latter, which already account for the bulk of the SAR’s win, are also big spenders in the casinos’ food, entertainment and shopping venues (remember, non-gambling activities can account for half a casino’s income, and they’re just getting started in Macau).

The Hong Kong-traded casino stocks, which have been very weak performers since early in the year, seem to me to have already discounted the negative developments I’ve described above.

In my view, the worst hurt by the VIP slowdown will be the traditional casinos run by the Ho family.  The least affected will be Sands China, Wynn Macau and Galaxy Entertainment (I own Galaxy and the parents of the two others).

I’m not rushing to add to my exposure (although I think I may have missed the bottom in Wynn Macau a couple of weeks ago), but i have no desire to sell, either.



Macau Gambling: May 2013 Market Results

The day before yesterday, the Macau Gaming Inspection and Coordination Bureau published the aggregate amount won from patrons by the casino industry in the SAR.  Results were as follows, in millions of MOP (Macanese patacas):

Monthly Gross Revenue from Games of Fortune in 2013 and 2012
Monthly Gross Revenue Accumulated Gross Revenue
2013 2012 Variance 2013 2012 Variance
Jan 26,864 25,040 +7.3% 26,864 25,040 +7.3%
Feb 27,084 24,286 +11.5% 53,948 49,325 +9.4%
Mar 31,336 24,989 +25.4% 85,284 74,314 +14.8%
Apr 28,305 25,003 +13.2% 113,589 99,317 +14.4%
May 29,589 26,078 +13.5% 143,178 125,395 +14.2%

Source: Macau Gaming Inspection and Coordination Bureau (DICJ)

At MOP 29,6 billion (US$3.7 billion), the monthly gaming win for May was the second-highest on record, exceeded only by the MOP 31.3 billion posted during the holiday season in March.  It was also a 13.5% year-on-year gain.  The strong–but not blowout–comparison came against the last healthy month of 2012. From June onward, a combination of economic slowdown and the desire not to attract much attention in advance of the change in leadership of the Chinese Communist Party caused a stagnation in market win until last December.

what to look for in market development

1.  Although what will likely turn out to be a 15% yoy growth rate for 2013 is nothing to sneeze at, it would no longer be the gold rush we’ve come to know and love in Macau.

Normally, I’d guess that maturity for Macau gaming will be 10% annual growth–because that would basically in line with my guess at China’s trend nominal GDP expansion rate.  But since China is attempting a macroeconomic transition away from low value-added manufacturing based on large wage increases rather than currency appreciation, I want to pencil in a higher number.  I’m just not sure what it should be.

2.  In addition, I don’t think Macau is mature quite yet.  Better transportation links will allow the SAR to reach progressively deeper into the mainland for customers.

3. Macau is unique in my experience, because it is dominated by high stakes baccarat played by extremely wealthy, highly skilled gamblers who don’t lose a large percentage of their bets and who have a large chunk of their losses rebated back to them as the price of their patronage.

In contrast, upper income, but not insanely wealthy, gamblers in Las Vegas have percentage losses on their bets of about 10x what the high rollers do.  So the broadening of the market to include more of the first group may bring profits to casinos that are very much higher than Hong Kong analysts now expect.

4.  Market momentum is moving toward Cotai.  That’s the newest area.  It’s also where the new capacity is opening. Galaxy Entertainment and Sands China are the prime beneficiaries.

5.  Former also-rans are now leading the pack.  Operators like Wynn Macau, who have been the most desirable destinations as well as efficient since opening in wringing every last avo (1/100 of  pataca) from their plant and equipment, will stagnate in gaming operations until they can open new capacity.

5.  Non-gambling offerings–restaurants, shows, retail–are in their infancy in Macau.  In pre-Great Recession Las Vegas, they brought in half the industry’s profits.  If Macau follows suit–and I don’t see why it shouldn’t–this could be an enormous positive surprise to Hong Kong investors.  Wynn Macau and Sands China will likely be the stars in this arena.

how mature is the Macau gambling market today?

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.


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.