Forecasting the gaming sector for the year ahead depends upon whether 2015 will be a replay of 2014, or if the next three quarters provide some good news for the battered sector. As the first quarter of 2015 trading came to a close, on a trailing 12-month basis, the average performance of Macau gaming stocks was down 45% year over year. Macau gaming’s February 2015 revenue was still 2.7 times that of the state of Nevada, yet, unlike Las Vegas, Macau profits depend predominately on gaming revenue. There are future positive, and in places, negative influences that have and will exert pressure on “VIP” and “mass market” gamblers that visit the gambling island. Understanding these influences is key to recognizing the risk and potential reward in this sector. Without a doubt, the yin (negative) is grossly out of balance with the yang (positive). If there is a confluence between the two, it would prove positive for the sector.
In 2014, the Chinese Central Government began a crackdown targeted at extravagance among government officials in an effort to address corruption. The crackdown also targeted Macau’s “Junket” business, a transportation and lending system which on the fringes, had ties to money laundering and possibly provided avenues for wealthy Chinese to illegally remove money from the country. Most of the Macau casinos catered to the VIPs that utilized these junkets. Since the crackdown, there has been a noticeable drop in attendance of wealthy gamblers. These conspicuous activities targeted by the government are partly to blame for the 39% drop in the March 2015 year over year Macau gambling revenue. The other negative was aimed at the mass market gambler.
Smoking Ban Extinguishes Casino Revenue
In October 2014, a government-directed smoking ban was enacted in casinos in Macau that effected the growing mass market segment. Beijing has been concerned with the increasing social cost derived from smoking, yet has historically received large tax payments from the sale of tobacco, and has erred on the side of the employment that comes from the large industry. Revenue derived by mass market gamblers had been increasing overtime countering the competitive VIP segment. But gamblers who smoke are required to leave the floor, reducing their “play per hour” expected revenue. Casinos had been shifting marketing strategies to attract these mass market gamers, since the group does not have the same “comp” cost. With declining revenue as a result of the smoking ban, the only way to recover is to open new properties, and attract more gamblers with more rooms and gambling opportunities.
Macau’s yin is offset by the promise of a strong yang. New properties have been seen as a catalyst to revenue growth for the past two years as Macau’s property growth flattened out. The second half of this year will see new mega casinos open, with additions seen in 2016 and 2017. The additional rooms and gambling tables along with more retail and entertainment opportunities could provide a base for the declining stocks. The casino stocks provided the investment for these properties and will be able to generate revenue once the new locations open. Additionally, the news cycle will benefit from positive stories about the new casinos, instead of the continuation of the poor 12-month comparable revenue stories. Around the time of the improving news cycle, the 12-month comparable revenue results should improve as well, as weakness from last year improves the comparison to the current period.
Negative governmental influences surly popped Macau’s stellar growth story, yet the future positives of new properties will eventually win out and stabilize the areas revenue prospects. Investment prospects in the Macau gaming should have a brighter future, as the positives begin to get in balance with the overwhelming negatives from the past. As with any gamble, you need to look at potential risk and reward. The Macau gaming sector may be able to provide a reward for those who are patient to play.
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