Investors place their bets on a Macau turnaround
People are doubling down on casino stocks as the gambling enclave shows signs of a making a positive shift after reporting that gaming revenues grew at the fastest pace in three years
Investors are doubling down on Macau casino stocks as the gambling enclave shows signs of a turnaround after reporting gaming revenues grew at the fastest pace in three years.
The gaming sector set the pace in the Hong Kong market last month, climbing more than 10% and ranking fourth out of 43 sectors measured by DBS Group. The hot streak has continued so far this month through April 11, with SJM Holdings surging 14.2%, Wynn Macau up 9.5% and MGM China trading 9.4% higher during that time.
Shares have risen since Macau’s Gaming Inspection and Coordination Bureau announced gross gaming revenue in March increased 18.1% year-on-year to MOP 21.2 billion. That beat a median estimate of 15% growth in a Bloomberg survey and marks the largest jump since a 40.3% year-on-year increase in February 2014.
After being in the red for 26 straight months starting in 2014, Macau’s gaming revenue is now on an eight-month winning streak.
“The sector is well on course to regaining its past glory, albeit without the erstwhile excesses,” Aranca analysts including Pallav Mittal wrote in a recent research note. “It is on a firmer and stronger ground than ever before.”
The improving revenue numbers so far this year have led research analysts to increase their 2017 year-on-year growth forecasts for Macau’s gross gaming revenue.
Nomura increased its target from 8% to 12% and Deutsche Bank Securities upped its projection from 10% to 12%.
Gaming in Macau has followed a boom-bust proposition. The former Portuguese colony is the only location in China where casinos are legally permitted and competition for market share has heated up since a four-decade-old monopoly on operating concessions ended in 2002. With just half the land area of Manhattan, Macau already has more than 30 casinos.
Money hitting the tables fell sharply in recent years, however, amid crackdowns on corruption and currency outflows in China. Gross gaming revenue declined 36.5% to MOP 223.2 billion in 2016 from just two years previous. Despite the drop-off, that was still more than four times what the Las Vegas Strip took in last year.
New capital controls have targeted big spenders in particular. In December last year, a cap of MOP 5,000 per withdrawal at Macau ATMs was imposed on users of mainland bank cards. The new rule did not change a daily withdrawal limit of 10,000 yuan (US$1,450) per day, however.
Hope for a turnaround in Macau’s casino stocks is pinned on the mass market being able to pick up the slack for VIPs as a revenue driver. Macquarie expects gross gaming revenue from the mass segment will grow by double-digit percentages annually through 2020 and contribute HK$219 billion (US$28.18 billion) to an estimated total HK$340 billion in that year, according to analysts including Zibo Chen in a January report.
Recent visitor data shows that the transition to the mass market is already under way as the city’s appeal extends beyond punters to include holidaymakers as well. Overnight visitors to Macau in the first two months this year increased a combined 11.1% year-on-year to 2.6 million.
Tourism should increase further as major infrastructure projects start to come online. The initial phase of a planned mass transit system may be operational by 2019 and will make it easier for tourists and locals alike to move about the city.
Another project under construction is a bridge connecting Macau with Hong Kong and Zhuhai. It could be completed by 2020 and would bring a vast swath of the highly populous Pearl River Delta into Macau’s orbit.
A new ferry terminal may also open next month in Macau’s Taipa region, according to local media reports. Near the casinos and resorts on the Cotai Strip, this new transport hub should increase foot traffic to mega-sized properties in the area like Galaxy Macau, Wynn Palace and Sands China’s The Venetian Macao.
Despite hopes for a turnaround in Macau, concerns still remain. For one thing, competition in the region’s casino market is increasing.
Japan legalized casinos last December and Vietnam authorized a pilot program this year that will enable local citizens meeting certain thresholds to gamble at designated casinos. The new developments add to already established gaming hubs in Singapore, South Korea, Malaysia and the Philippines.
There is also concern that China’s attempts to tighten monetary policy and reign in rising property prices could weigh on Macau. Macquarie thinks this fear might be overdone, however.
Macquarie’s Chen wrote, “We do see more upside than downside policy-wise, considering that Beijing wants a stronger Macau as a world-class tourism and leisure destination.”