he world’s biggest gambling city is back on a winning streak. But this one is less high stakes.
Gross gambling revenue in Macau has risen year on year for five straight months since August after 26 months of decline. The figure for the year in the semiautonomous city, the only place in China where casino gambling is legal, was down slightly from last year, but it seems likely the bottom has been found.
Yet Macau is a different city from the boom years since its casinos lost gambling revenue equivalent to more than two Las Vegas strips
Low-stakes “mass gamblers” make up of almost half the revenue. Two years ago, it was around a third. China’s antigraft effort since Xi Jinping became president in 2013 has driven away high rollers. VIP revenue has more than halved.
Casinos earn better margins from mass gamblers, as they don’t need to pay commissions to middlemen known as junkets, which draw in the whales. Several of the casino operators have completed a recent investment spurt in which they poured billions of dollars into new resorts. Better cash flows should follow. Yet without VIP gamblers, casinos will see slower growth.
Despite signs that VIP revenue has been picking up in recent months, 2017 is unlikely to show a real turnaround. Housing prices in China look to be peaking, and credit is getting tighter. Both factors have historically been correlated with VIP revenue in Macau. China’s clampdown on capital outflows also hurt. A report that UnionPay, China’s version of Visa and Mastercard, would impose a withdrawal limit in Macau sent casino shares sharply down in early December. Though the report wasn’t accurate, the incident shows how sensitive Macau is to Beijing’s policies.
Macau stocks rallied sharply in 2016. The valuations of the six Macau casino operators are above their long-term averages in terms of enterprise value to forward earnings before interest, taxes, depreciation and amortization
Analysts on average expect Ebidta growth in 2017 of 12%. But even that may be hard to achieve for all.
Operators that have a record of sweeping up vacationers and casual gamblers seem best placed. Sheldon Adelson’s Sands China, with its new $2.7 billion Parisian Macao, is one of them. Galaxy Entertainment, with hotels featuring huge artificial beaches, could be another. SJM, controlled by Stanley Ho and which used to have a monopoly on gambling in the city, may continue to underperform despite its apparent cheap valuations, as it will not open its newest casino until 2018.