The column below is one of a series that elaborates on our recently published outlook for gaming investments in 2023.
In this case, we comment on our thesis that Macau gaming will rebound in 2023 taking casino stocks up and creating a trading opportunity, but that more powerful forces will limit Macau’s long-term potential.
Macau gaming stocks have rebounded mightily of late, doubling and tripling from their 52-week lows. Even so, they remain modestly valued based on anything resembling a recovery to normal operating levels. As such, the stocks of the six concession holders have plenty of room to rise.
However, they are trades, not long-term investments because the political environment created by the Chinese Communist Party remains, and is likely to remain, hostile to gaming as an industry.
Analysts have been issuing reports trying to quantify what recovery will mean for the stocks. However, such attempts miss the mark because they are based on the false premise that there will be something like a return to what was once considered normal.
They also talk about the reopening of China as COVID restrictions are eased, though that doesn’t change the Communist Party’s antipathy towards gaming.
An analysis of Macau’s gaming industry’s potential has got to be premised on the strategic outlook for the industry, and that is one of long-term constraint and decline.
Let’s look at the situation.
The national Chinese government and, where needed, the Macau government, have put into place the long-term limitations. The junket business has been all but done away with. The marketing of gaming to Chinese nationals has been all but eliminated. Macau has been placed into an economic zone tasked with developing through high technology, not tourism and most certainly not gaming.
One can argue that casinos are too important to the Macau economy not to be protected by the government. But, by definition and by simple third grade mathematical calculations, Macau’s inclusion in the economic development zone reduces the percentage of gaming’s contribution to the region’s economy, thus its importance.
Those who wish to ignore these realities will point to the new law governing the Macau gaming industry and to the renewal of the six gaming concessions.
But what does the new law say? It says its first policy goal is national security. What the heck does national security have to do with running casinos, and how is it defined?
As renowned gaming attorney I. Nelson Rose has noted: “National security gives the government unlimited power. So, if Macau’s chief executive decides to terminate a casino concession, he is no longer bound by the criminal laws.
“What constitutes national security? The definition has been stretched to include economic, technological, cyber, and financial security, especially money flowing out of the Chinese Mainland,” Rose says.
The new law includes other goodies, like requiring concession holders to invest millions more into Macau for economic development and to diversify away from gaming. A cynic might say that, for the privilege of doing business in Macau, casino companies must spend on their own eventual demise.
Of course, there are carrots to go along with the sticks, such as a tax break for developing non-China businesses. But international players contribute just 3.58 percent of Macau gaming revenues. And, realistically, how many of them will want to come to the new, heavy-handed Macau when competition is fast developing elsewhere in Asia including attractive alternatives like Singapore, Vietnam, Manila, Seoul and likely in several years, Japan?
Current concession holders all publicly say they are happy to be in Macau and they tout its future. But what else are they to do? Abandon billions of dollars of investment?
Their only prudent course of action is to abide by the new rules and do the best they can knowing that the national Chinese government isn’t about to let the Macau economy suddenly collapse. Meanwhile, they are wise to pursue geographic diversification.
As for investors looking for long-term growth, the grass is greener elsewhere.
