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Macau casinos turning to the common man
[HONG KONG] Chinese gambling enclave Macau is suffering from deja vu. Investors worry a less vibrant VIP market heralds hard times, as it did in 2011. Shares in SJM, Wynn Macau and Galaxy Entertainment have fallen by as much as a fifth in September after the gambling enclave's largest junket, Suncity, warned of a tepid outlook for well-heeled patrons. But this time could be different.
Growth at the higher end is unquestionably slowing. Gaming revenue from VIPs rose by 13.5 per cent in the second quarter, compared with a peak of 34 per cent last year. Part of that is due to competition: new casinos targeting wealthy Chinese have opened across South-east Asia, and the junkets – middlemen who organise and fund glitzier gambling escapades – are shifting more of their business into these lower tax jurisdictions, where they can earn fatter commissions. With their help, upstarts in Cambodia and the Philippines raked in at least US$1.4 billion from VIPs in 2017 – equivalent to roughly 7 per cent of Macau's revenue from high rollers the same year. Deutsche Bank analyst Karen Tang argues that weaker Macanese VIP spending portends a weaker mass market, too, as it did in 2011.
Analytical caution is warranted. President Xi Jinping's corruption crackdown halved VIP spending in Macau in 2016, and that low base flattered 2017 growth figures. So 2017 in turn set a very high bar for comparison this year, making it harder to divine broader trends.
Regardless, Macanese operators have hedged dependence on the wealthy, refocusing on humbler players, who are less likely to follow the junkets into South-east Asia. They are also diversifying, as evidenced by the jumble of theme parks and conference halls under construction. Where VIPs once accounted for almost three quarters of Macau's gross gaming revenue, today that figure is closer to half, and less than a quarter of the bottom line, according to Breakingviews estimates.
Which is not to say middle class punters are immune to economic stress. The weaker yuan could prompt Beijing to crack down further on capital outflows, for example, which would really sting. More foreboding forecasts could cause these notoriously volatile shares to fall further. But that doesn't mean that history is repeating.
Shares in the Hong Kong-listed Macau casino operators – Galaxy Entertainment, Melco International, MGM China, Sands China, SJM Holdings and Wynn Macau – are down 13 per cent since the beginning of September. The benchmark Hang Seng Index fell by 1.4 per cent in the same period. The six stocks fell by an average 22.5 per cent in the first 12 days of September.