2011 has been a banner year for gaming companies with operations in Macau. The Chinese gambling enclave has grown gaming revenue at an astounding 44.1% so far this year and shows no signs of stopping.
But 44.1% growth isn't sustainable forever, so it's time to ground our expectations for 2012 in Macau.
The "experts" weigh in
I'll start with what analysts are predicting for gaming growth next year. S&P analyst Joe Poon is predicting 10%-15% growth in gaming revenue in 2012, a major slowdown from this year. Credit Suisse analyst Joel Simkins recently said, "growth at or exceeding 20% in 2012 is not unreasonable."
Early last year, analysts at CLSA Ltd. predicted 20% growth for 2011, only to raise that estimate to 30% and in the end be blown away by the growth that actually occurred.
Analysts have to make these kinds of predictions to model gaming companies, but the only consistency in their predictions is they're usually wrong. And in Macau they have consistently underestimated growth in the region. Could we see the same thing in 2012?
A Fool weighs in
I'm not foolish enough to make a precise prediction, but I will point out that in 2010 gaming revenue grew 57.8% and in 2011 it grew 44.1%. In the last few months, growth has slowed from 57% in August to just 32.9% in November.
Based on these trends, it's reasonable to predict that growth will be less than 44.1% but will probably remain well into double digits. In fact, I don't think analysts are off in expecting a slowdown to 15%-25% growth.
What changes significantly in 2012 for gaming operators is there is very little capacity coming online. In recent years, Wynn Resorts (Nasdaq: WYNN ) , MGM Resorts (NYSE: MGM ) , and Galaxy have all opened giant resorts, which dilute existing operators like Las Vegas Sands (NYSE: LVS ) and Melco Crown (Nasdaq: MPEL ) . It's not bad to build critical mass in an area, but this expansion can make revenue growth at existing casinos look disappointing compared to overall gaming growth.
Las Vegas Sands' Cotai Central is the only major development scheduled to open next year, and it will be a staged opening throughout the year. So gaming growth will be spread largely between existing casinos, meaning revenue growth on the casino floor in 2012 may outpace 2011 at many resorts.
It's for this reason that I'm bullish on gaming stocks heading into 2012. I think we'll see growth head directly to the bottom line and operators focus on paying down debt with excess cash or save up for future expansions.
There are risks that investors should keep an eye on, like China's potential housing bubble. But barring something catastrophic, I expect another great year in Macau with record profitability across the board.
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