How Fast Is Macau Really Growing?

Since Las Vegas Sands (NYSE: LVS  ) opened its first casino in Macau, ending a four-decade monopoly by Stanley Ho, the gambling enclave has grown faster than most of us could imagine. The area has not only passed Las Vegas as the gambling hub of the world, but it now also dwarfs the revenue The Strip brings in.

After posting 42.2% growth in 2011, the question now is: How long can this growth last? That kind of growth rate isn't sustainable forever, and Macau will slow, probably considerably this year. And if gaming revenue growth slows, it will have a direct impact on Melco Crown (Nasdaq: MPEL  ) , Wynn Resorts (Nasdaq: WYNN  ) , and MGM Resorts (NYSE: MGM  ) , which all operate casinos there.

Where we've come from
Any discussion about how fast Macau is going to grow has to start with where we've been. Since 2009, gaming revenue has grown from around $1 billion per month to an incredible $3.1 billion last month. The following chart shows the monthly gaming revenue and a three-month simple average to smooth out some of the bumps.

Source: Macau Gaming Inspection and Coordination Bureau.

Another interesting thing is the amount that growth has slowed in recent months. From May 2009 to October 2011, the moving average declined month to month only three times. In the last three months, the same average has declined twice. Gaming revenue has been in something of a stalled pattern since May 2011, when Macau passed $3 billion in monthly gaming revenue for the first time.

China concerns
There are also macro concerns to think about when looking at in Macau, both good and bad. China is growing much faster than the U.S. -- an estimated 8.25%, according to the International Monetary Fund in 2012. That will lead to more wealth, a larger middle class, and more potential revenue for resorts both on and off the casino floor.

But a hard landing for the real estate and banking sectors, along with continuing concerns in Europe, could affect Macau as well. Fitch Ratings has identified a hard landing in China as the No. 1 risk for the world economy in 2012.

Where are we going?
Macau's gaming growth has slowed, at the very least, and there are potential risks that could affect Macau from a macro level slowing growth further.

I think it's probably reasonable to expect some growth in 2012 gaming revenue, but the 42.2% growth from 2011 is a pipe dream. More realistically, investors should expect much more modest numbers, especially when comparisons get harder in May. In the second half of the year, I think high single-digit growth is probably a more reasonable expectation.

If growth indeed slows to these levels, investors may need to consider the premium they're willing to pay for gaming stocks. An enterprise value-to-EBITDA ratio of 12, like Las Vegas Sands trades at, is reasonable when a company is growing and adding capacity. But when the company stops building new resorts and growth in Macau slows, the multiples may need to come down a little.

A junket's role in Macau
Another interesting dynamic to watch is how casinos attract gaming dollars if growth slows. Las Vegas Sands has been focused mostly on mass-market gaming but is adding junket rooms that cater to high-end clients. As junkets like Asia Entertainment & Resources (Nasdaq: AERL  ) expand their reach, will competition for their services increase or decrease?

Junkets only have so many casinos to deal with and only six concessionaires in Macau to negotiate with. If casinos do increase their competition for junkets, it's a zero-sum game that is tied to how much Macau grows. That's why I think casinos have the upper hand in Macau right now.

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Fool contributor Travis Hoium has no position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

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Read/Post Comments (11) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2012, at 5:25 PM, Senescent wrote:

    Travis, the vast bulk of the revenue in Macao comes from VIP players who are the very tip of the Chinese income distribiution. Sure mass market contributes some and will contribute more. Paradoxically, the number of folks who qualify as VIPs grows faster than the overall Chinese economy. If China's GDP continues to grow at around 8%/year, VIP gambling will continue to grow at better than 20%/year. Will it be 40% this year? Absolutely not but, barring accidents and wars (trade or otherwise), 25% is pretty much locked in this year by the demographics of the Chinese distribution of income.

  • Report this Comment On February 08, 2012, at 5:48 PM, king4life wrote:

    It's the year of the Dragon. Which is a lucky year.

    AERL already reported the win rate increased in January. When that news gets out, the traffic will only be even greater. Mass Market will grow by default. But the VIP is where the margins are the best. Competition for AERL services will grow as the casino's offer better deals.

  • Report this Comment On February 08, 2012, at 6:54 PM, spokanimal wrote:

    A novice gaming investor would look at this article and think... "oh no! gaming revenue is slowing so these companies are overvalued".

    A responsible journalist would have portrayed both the demand AND the supply side of the macau gaming industry in order to prevent ill-advised, knee-jerk responses by investors to articles like this.

    What Mr. Hoium so conveniently left out in his quest for sensationalism with this piece is that the growth of gaming supply has been greatly curtailed in macau as well.

    First, there was the recession of "09, which stopped all construction at Galaxy & Sands Cotai Central... the 2, principle mega-resorts under construction at the time. While that construction has since re-started, Galaxy has opened, and Cotai Central is poised to begin opening, there are absolutely no other resorts under construction and, aside from Cotai Central, there will likely be no further resort openings until 2016.

    Further, Macau SAR has instituted a limit to annual growth of gaming tables, and construction labor shortages make it likely that construction approvals could be serially vetted in future years.

    In september, we saw the first, significant indication of the encroaching table shortages as MGM launched junket suites with the caveat that they would be converted to direct VIP during the first half of 2012... it's safe to say they wouldn't do that if tables were plentiful and junket competition hadn't reverted to a suppliers market.

    Anyone who knows a casino's response to capacity constraints knows how it feeds revenues to the bottom line. Increased table minimums employ no additional staff or overhead, but raise the drop... need I say more?

    So, what Mr. Hoium has done here is to raise folk's hackles by telling half of a story...

    ... the half that vents what appear to be his biases.

    Spokanimal

  • Report this Comment On February 08, 2012, at 8:08 PM, TMFFlushDraw wrote:

    @Senescent

    25% is a lot. I will take the under on that considering the tougher comparisons starting in May. Before then 25%+ is very reasonable.

    @spokanimal

    It is absolutely correct that supply will only grow slightly this year with the addition of Cotai Central. Maybe I could have mentioned that, but I can't mention everything in every article. I have faith you would always find something I didn't mention. You have to admit that growth has leveled off in recent months, something that most people probably don't realize.

    As for whether I think LVS (since that's the company you all focus on) is a BUY, I'll get back to you after MGM and MPEL report earnings and I do a complete analysis, as I do every quarter.

    Travis Hoium

  • Report this Comment On February 08, 2012, at 9:02 PM, cp757 wrote:

    Travis good job on reporting some facts that the other writers for Motley Fool have reported wrong. First you are right Las Vegas Sands got to Macau before Wynn.The only thing I wanted to point out Travis is I noticed in your portfolio that your a bull betting that the economy in China will get better and your top 5 picks are all up because of that, you took those positions in mid to late 2011. If you follow this idea you should want the investors to know where the big money is going .China is going to grow and those positions in your portfolio show that . Your 6th best position is on LVS over any other position in your portfolio.That makes some of your ideas in the article confusing when I look at your portfolios success .I think the slowing in China is misunderstood. China is the main benefactor to the growth of Macau and has an interest in building Macau to a 100 billion dollar a year destination and is over a third of the way to that goal .China's casino tax is an indirect way for Beijing to capture some of the vast untaxed income in China, where only 3 percent of workers pay income tax and it is universally believed that many fortunes made in business escape the Chinese tax enforcement system.so this is a voluntary way to collect that tax.With the added rooms coming on line with LVS I believe the government will encourage more traffic to Macau .Las Vegas Sands ,Cotai Central is going to add 6000 rooms over the next year and is opening 2000 in two months so Las Vegas Sands is the only gambling stock that will continue to take market share from all the other casinos.

  • Report this Comment On February 08, 2012, at 10:47 PM, cp757 wrote:

    Travis you seem surprised that people that invest in gambling stocks like LVS (since that's the company you all focus on) would call anyone to task over the facts on different casinos. Investors do a lot of work finding out the history of the company, the revenue, the people that run the company and all the things that make up the decision to buy even one share. Then a writer says that Wynn was first to Macau?Even the videos have had the commentator say the owners name wrong. We laugh at the inept writing and the arrogance of the writer but if we don't challenge the errors how will the Fool writers get better.Some investors live and breath the company's they invest in and know more than you would but then you have hundreds of stocks to research .JMHO

  • Report this Comment On February 09, 2012, at 2:33 AM, Goldenpattern wrote:

    Yet another article by the most ignorant writer reporting on Macau. Does MF even check any of this? Someone should do an expose on these "reporters" and show how unqualified they are. No wonder this dbag is still unemployed.

  • Report this Comment On February 09, 2012, at 8:53 AM, berg80 wrote:

    Travis,

    You are nothing if not consistent. Consistently wrong. I'd suggest that you listen to MPEL's conference call regarding how junkets in Macau are being heavily recruited, being offered enhanced compensation, in order that the casinos maintain or improve their VIP business. But that would represent actual research on your part, something we know from reading your other factually incorrect articles you are loathe to do.

    You are an embarrassment to yourself.

  • Report this Comment On February 09, 2012, at 12:09 PM, Senescent wrote:

    Goldenpattern - Travis is not an ignorant writer. Neither I nor Spokanimal would respond to his articles in detail if they were ignorant and devoid of content. Speaking for myself, I merely wish to add further perspective to Travis's articles.

  • Report this Comment On February 09, 2012, at 1:29 PM, spokanimal wrote:

    @ Travis Hoium,

    Thank you for your resonse, Travis.

    Yes, I agree that macau SAR gross gaming revenues are slowing... but that said slowing should be taken in the context of the regional economy to determine it's liklihood of persistence.

    Given that monetary tightening measures began in China roughly 17 months ago, here are the corresponding quarterly revenue tallies:

    Q4-10 55.12 mop

    Q1-11 58.46 mop

    Q2-11 65.61 mop

    Q3-11 70.17 mop

    Q4-12 73.52 mop

    Clearly, there is a slowing, and it coincides with the building impact of China's credit policies and resulting GDP, which continued it's decline to 8.9% in Q4-11.

    In October, China began a covert covert easing policy, followed by tacit, overt measures in November. Subsequently, we saw their ISM move back above 50 following a brief dip below 50, anticipate Q4 GDP of 8.6% suggest a soft-landing at 8.9%, and a rather brisk surge in lending. On the casino side, there were scattered reports of marker curtailment with weaker junket aggregators but private sources pretty much covered VIP credit and month-end settlements with the resorts remained solid. Today, Lawrence Ho indicated that 15-20% growth appeared likely for 2012.

    My own view is that China will continue with selective and targeted easing which, when combined with infrastructure improvements and the first full year of Galaxy/CC on cotai, will yield gaming growth of 20 to 23% for 2012. The skew will be more toward the mass market given that VIPs are more impacted by Chinese industry whereas mass patrons are more impacted by the position that wages and salaries hold at the top of the domestic inflation food chain there.

    Aside from revenues, look for 2012 to be the first year that we see the impact of true supply constraints. As I mentioned, full tables with no idle capacity mains jumped minimums and revenue flow-thru. Leading indicators here are the aforementioned MGM table-juggle, as well as Sand's reports of fully-loaded junket suites at cotai central and double the junket applications for remodeled 4-seasons/venetian suites as they had capacity for...

    ... so look for 2012 to be a year when EBITDA growth outpaces revenue growth... particularly at Sands, where Cotai Central hotel capacity will greatly enhance overhead absorption at the traditionally under-utilized Venetian.

    Spokanimal

  • Report this Comment On February 10, 2012, at 12:05 AM, TMFFlushDraw wrote:

    Thanks for the constructive comments. MPEL earnings take will be up tomorrow.

    Travis Hoium

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