No end in sight yet for Macau's slump expected to continue

Macau’s troubled 2014 brought about the world-leading market’s first year-on-year decline in gaming revenue in the post-monopoly era.

Following a record 30.4% plunge in December, the seventh straight month of shortfalls compared to the previous year, the combined haul of the 35 casinos came in at 2.6% under 2013 revenues to total US$44.1 billion.

March was the year’s second-best revenue month at +13.1%. The combined haul for the first quarter was up a 19.8% over 2013.

This year those numbers are not likely to be even approached, let alone equaled, as the political and economic headwinds out of mainland China that battered the market in the second half of 2014 show no signs of abating.

The central government’s crackdown on high-level corruption and illicit money flows has scared off the VIP players who generate more than two-thirds of the casinos’ annual revenue. A slowing economy and falling property prices on the mainland also have crimped the flow of credit, the lifeblood of the junkets that recruit and bankroll the ultra-high end. The junkets themselves have come under increased scrutiny as part of an intensive drive to stem the flight of capital out of China, which has reached massive proportions.

As the only place in China where casino gambling is legal, Macau’s gaming revenue expanded 8.5 times since the market opened to competition in 2004 with the debut of Las Vegas Sands’ Sands Macao and Stanley Ho’s 40-year monopoly came to an end. At its peak of growth, the market soared 58% in 2010 and 42% in 2011. The US$ 45 billion recorded in 2013 was seven times greater than what the Las Vegas Strip took in.

“Macau will never see those growth rates again,” CLSA analyst Aaron Fischer, based in Hong Kong, told The Wall Street Journal. “The VIP heyday is over,” said Philip Tulk, a Hong Kong-based analyst with Standard Chartered.

Mass-market revenues, which were growing at triple-digit rates early in 2014, also have slid dramatically as a result of tougher enforcement of existing visa restrictions for mainland travelers, a floor-wide smoking ban, and increased scrutiny of the country’s state-run UnionPay cash card system, historically a popular method for mainland gamblers to skirt currency limits.

Pro-democracy protests by students in Hong Kong also disrupted visitation, swamping the city center for two months in October and November with thousands of demonstrators.

Reflecting the generally bearish view among analysts, investment brokerage Union Gaming Research 

Macau is forecasting revenue to fall 13-17% in January, 20% or more in February and a March that will “look a lot like January”. All in, we would expect 2015's first quarter gaming revenue to decline to the low-to-mid 20% range,” the firm said.

The market is hoping for a rebound in the second half as two of eight new resorts under development open their doors. But as the city’s largest operator, SJM Holdings, said last month in a company memo obtained by Bloomberg News, a “breakthrough improvement” will be hard to come by.

“With revenue trends still decelerating sequentially, it is now unlikely that the overall Macau market will grow in 2015,” Well Fargo analyst Cameron McKnight said in a recent client note.