Record-breaking declines in October, December
Last year saw a startling decline in Macau’s once-invulnerable casino industry. And analysts say more tough times loom for the world’s biggest gaming jurisdiction.
The slump follows a crackdown on corruption and money laundering by Chinese President Xi Jinping. Greater scrutiny of money leaving the Mainland has scared off many high rollers for whom Macau was a private playground. Bloomberg reports that casino revenues in the city fell 2.6 percent to 351.5 billion patacas ($US44 billion) in 2014.
In December alone, the former Portuguese colony saw a record 30.4 percent monthly drop, according to figures from Macau’s Gaming Inspection and Coordination Bureau. In December, gaming revenue fell 30.4 percent to $2.9 billion, Macau’s largest-ever single month decline and the seventh straight monthly decrease. Analysts projected a 2 percent annual decline. But the declines this year have been staggering. The last four months of 2014 saw double-digit decreases, including a record 23.2 percent dip in October, which stood until December.
“The VIP heyday is over,” Philip Tulk, an analyst at Standard Chartered Plc in Hong Kong, told Bloomberg. “The anti-corruption crackdown doesn’t look to be a short-term phenomenon.”
During an unprecedented two-day visit last month, Xi?who has not been to Macau in five years?said the city must diversify its economy beyond gaming, which now accounts for 80 percent of annual government revenues. Observers say a slowdown in Mainland China’s economy is behind the crackdown, which has wiped out about $73 billion in market value of companies including Wynn Macau Ltd. and SJM Holdings Ltd.
Macau, sometimes called “the Monte Carlo of the East,” is the only Chinese city where casino gaming is now legal. Its first casino, Sheldon Adelson’s Sands Macau, opened in 2004; from the outset, the industry experienced exponential growth, expanding 8.5 times over 10 years. By 2007, Macau had surpassed Las Vegas as the world’s leading gaming destination.
Analysts disagree about the long-term impact of the crackdown. In a December note, Cameron McKnight of Wells Fargo & Co. wrote that it is “unlikely” the overall Macau market will grow this year. Wells Fargo and Union Gaming Group both estimate a 20 percent year-on-year decline in the first quarter, while CLSA predicted a 29 percent drop. But CLSA’s Aaron Fischer said the city will see “stabilization in revenue” in the second half of year, with “new projects that will drive volume growth.”
Three U.S. gaming companies?MGM Resorts International, Las Vegas Sands Corp. and Wynn Resorts Ltd.?all are expanding their presence in the city’s Cotai Strip region: Las Vegas Sands’ $2.7 billion Parisian, Wynn’s $4 billion Wynn Palace and the $2.9 billion MGM Cotai. Las Vegas Sands and Wynn Resorts derive the “vast majority of their quarterly earnings,” reported the Las Vegas Review-Journal. All three Vegas-based companies spun off their Macau holdings into separate publicly traded companies on the Hong Kong Stock Exchange.
Meanwhile, the city has seen some 50 VIP rooms close?half the number created since 2011? the Macao Daily reports. Despite all the dismal news, some observers predict the current Macau downturn will eventually give way to new growth. Morgan Stanley analyst Praveen Choudhary foresees a 4 percent decline in 2015, followed by 10 percent growth the following year, “fueled mainly by new hotel rooms and steady growth in spending per capita.”
He also forecast a “change of luck” for stocks this year due to better quarterly growth rates from the first quarter and the addition of new table games in some casinos. High-roller play could also rebound, he said.
Even so, according to the Sydney Morning Herald, billionaires James Packer, Sheldon Adelson and Stanley Ho “have been left with large holes in their pockets as analysts debate when a recovery may turn the fortunes of the world’s largest gambling hub.” If the losing streak continues in January, it would beat the record-breaking slide in 2008-09, the depths of the global recession, when revenue dropped for seven straight months, Bloomberg said.
“We are not being bearish for the sake of it,” McKnight wrote in a recent note. “But currently don’t see a reason to expect revenue improvement given China’s policy actions towards Macau.”
“All-in we would expect first quarter 2015 gross gaming revenue to decline in the low-to-mid 20 percent range,” agreed Union Gaming Group analyst Grant Govertsen. “This forecast largely assumes that there is no material change in either mass-market or VIP trends.”
However, Sands China and Galaxy are already shifting their focus from high rollers to vacationing Chinese and other mass-market gamblers by adding amenities such as shopping centers, theaters, restaurants and hotels. “The next wave of customers is going to be lower-spending customers,” Fischer said.
The Wall Street Journal reports that Beijing has identified Hengqin Island as the “linchpin of the diversification plan.” But the government has been “frustrated at the development pace there. The Macau Business Daily cited an unidentified central government adviser who said China is “no longer just suggesting changes to develop non-gambling ventures in Hengqin,” but ordering them. Located adjacent to the city of Macau, Hengqin Island, designated a special zone in 2009, is home to the new campus of the University of Macau and the Ocean Kingdom of the Chimelong Group, the world’s largest marine theme park.
