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FANTINI’S FINANCE: By Now, Macau’s Struggles May Warrant New Outlook on Market’s Future

As the once-mighty Macau market continues its uphill trudge, investors may want to rethink their expectations for recovery. Pre-Covid averages are attainable again, but it’s far from certain that the ceiling will continue to rise much past that.

FANTINI’S FINANCE: By Now, Macau’s Struggles May Warrant New Outlook on Market’s Future

That Macau casinos laid a brick in May should have come as no surprise.

The market has been in decline for years and is now suffering heavily from the Covid lockdowns. But May hit a new low in many ways. Revenue fell 68 percent below last year and 87 percent from May 2019, the last pre-Covid comparison.

That’s bad. What’s worse, casinos performed even below the lowest analyst forecasts, which averaged minus 63 percent and ranged from 55 percent to 67 percent down.

As usual, analysts predict a recovery when conditions normalize. To reassure investors, they have begun to report what they say are ample financial resources the casino companies have to survive losing money until that normalization arrives. However, the very fact that they have to do those calculations is cause for concern.

The reality may be that even after Covid, Macau’s recovery will be limited by the national Chinese government’s antipathy towards gambling, as evidenced by the near end of once-vaunted junket operations.

The four US-listed Macau casino operators have invested billions of dollars in the city and have reason to talk up a post-Covid recovery.

Las Vegas Sands CEO Rob Goldstein, on the very day May’s disappointing numbers were released, told the audience at a Bernstein investor conference that it is unthinkable and silly not to expect Macau to recover and grow. “It is an incredible market that will become bigger than ever,” he predicted.

But why should that be true? We have covered in this space before how the Communist national government squeezes and squeezes by degrees until it suppresses activities it doesn’t want. One need only look at the disappearing democracy in neighboring Hong Kong, a much more important city than Macau, to see that dynamic at its greatest effect, and to see what results from believing that Communist Chinese double-speak, such as “right thinking,” is anything but double-speak.

Consider again Goldstein’s comments about continuing to invest in the Macau region, even if it means pouring dollars into developing adjacent Hengqin Island rather than his own properties. “We’ll do whatever the government wants us to do,” he said.

That might be justifiable if the national government wants to make Hengqin-Macau some kind of Orlando of the East.

But that isn’t the plan. Instead, the national government is combining Macau and the nearby region into a special economic zone to develop high technology centered in Hengqin. Somehow, a hotel to provide gamblers for casinos doesn’t sound like the kind of investment that will result in the next generation of computer chips or the development of artificial intelligence.

Of course, Macau will bounce back from its current lows. The Macau government recognizes the importance of the casino industry to its financial well-being. That surely is why new gaming rules now under consideration appear to accommodate the six existing operators and may include a five percentage-point reduction in the gaming revenue tax.

But that does not mean a future of unbridled growth based on tapping the huge Mainland China population, or even a return to the peak revenues of several years ago.

A future where Macau continues to have Asia’s largest gaming industry seems a safe bet. But a dramatically larger one than before? That bet is worth hedging. Or maybe even shorting.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.