Happy Thanksgiving from GGB; Newsletter Returns December 4

FANTINI’S FINANCE: Macau Disease Spreads

Just because Chinese high rollers have backed off Macau doesn’t mean they’re going to magically appear in other jurisdictions. In fact, the numbers show that VIP gaming from China has dipped across the board. So what’s that mean for Asia?

When Macau was riding high and investors saw blue sky forever, we cautioned that government policies could end the giddy party.

Today, everyone knows that the biggest risk to Macau is government policy.

But the risk isn’t just to Macau, It’s to the rest of the Far East. So, let us warn again: Do not believe that casino gambling can grow to the sky in Korea, the Philippines, Southeast Asia, Australia or Vladivostok in Russia.

A lot of money is being invested in those places now under the assumption that they can poach Chinese gamblers.

Those investing on China’s rim support their claims by citing double-digit gains in Chinese visitation to Korea, Crown Resorts growing its high-end Asian play more than 40 percent at its Australia casinos, rosy projections of outbound Chinese tourism accompanied by descriptions of them being the biggest spenders of all international travelers.

But it isn’t so easy as building resorts to capture gamblers who have quit Macau.

Consider these warning signs:

• The Chinese government has stated clearly that it is not cracking down on gamblers to Macau just to allow other countries to lure them.

For evidence, look at the June arrest of 14 Korean casino executives in China charged with marketing directly to Chinese players on Chinese soil.

• The bloom already might be off the rose. Melco Crown reported that high-end Asian gambling has been lower than expected at its new Philippines casino. It’s very early for that property and things will change, but a new casino underperforming expectations is not a positive sign.

Paradise Co. in Korea reported a 31 percent drop in Chinese VIP play in the second quarter, more than twice the 12 percent decline in other VIP play.

Genting Singapore reported that a drop in high-end play was largely responsible for a 28 percent second quarter decline in gaming revenue.

Even properties as far away as River Rock in Vancouver, British Columbia, reported lower high-end Asian play.

• The much-touted diversification into tourist destinations might not make up for losing gamblers.

Genting Singapore is a case in point. Visitation to its Resorts World Singapore grew 9 percent in the second quarter to more than 18,000 persons a day, yet earnings sank because pure tourism just doesn’t generate the same profits as gambling.

Macau visitation has held up much better than gaming revenues, again because it takes a lot of tourists to make up for losing even one guy blowing a million bucks at a baccarat table.

• What happens in China stays in China. The Chinese government right now has bigger concerns than Macau or foreign casinos. It has to figure out how to get its economy moving again.

One attempted trick is the recent devaluation of the yuan.

Analyst Jamie Soo of Daiwa says the devaluation will hit Macau VIP play hard. He forecasts a 20 percent revenue decline that will translate into a 9 percent EBITDA hit.

He also expects mass-market play to fall eight to 10 percent.

Further, the economic woes will make gambling in Macau less appealing to many, Soo reasons.

• Local government policies matter, too.

Building casino resorts in places like Vietnam and South Korea is a gamble that laws will be changed to allow locals to play because, if those laws don’t change, the only reason to build them is to draw Chinese players.

• It’s always tomorrow. News that casino legislation will not be considered by Japan’s Diet this year is no surprise. As we’ve stated many times, the politics of Japan is a lot more complicated than passing a bill allowing foreigners to come in and make billions of dollars off Japanese citizens.

Likewise, fresh efforts at legalizing casinos in Thailand are not necessarily cause to celebrate. This pony has been ridden many times before.

Someday, Japan and Thailand might legalize casinos. And that someday might be soon. But I wouldn’t put a lot of money on it.

Articles by Author: Frank Fantini

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