Is Macau's Growth a Sign of Trouble?

Macau returned to strong growth in December and this has helped gaming stocks post great gains in recent weeks. Throughout most of 2012 the growth of gaming slowed, but December showed a huge turnaround with $3.5 billion in revenue, up 20% from a year earlier, bringing 2012's growth to 13.5%.  

Companies with a lot of exposure to Macau have jumped over the past month as investors anticipated the news. Melco Crown (NASDAQ: MPEL  ) , Las Vegas Sands (NYSE: LVS  ) , and MGM Resorts (NYSE: MGM  ) have all gained double-digit percentages in just a month, and Wynn Resorts (NASDAQ: WYNN  ) doesn't trail far behind.

LVS Total Return Price Chart

LVS Total Return Price data by YCharts.

These gains are all on the back of Macau's growth and particularly strong numbers in December, but there are reasons to think the strong December isn't such a good thing long-term. So, is this a good sign or a sign of trouble for Macau? I'll give both sides of the story.

The growth engine that doesn't stop
If you're a Macau bull, you can see the growth as a sign that the constant growth of the Chinese economy and growing infrastructure funneling gamblers to Macau is paying off. China grew at 7.4% in the third quarter, lower than recent years but still robust growth in such a large nation.  

As the country grows, so does the middle class, which adds to the number of people willing to gamble in Macau. The evidence can be seen by strength in mass-market play while VIP play has struggled throughout much of the year.

The bullish case is very simple, and it's easy to take growth numbers and translate them into strong fundamentals for Macau. But there's another side of the story that investors should consider.

Trouble on the horizon
One of the reasons December may have been stronger than recent months is that wealthy Chinese are likely getting money out of Macau before the new government is able to crack down on corruption and money laundering. I brought this up in November as a reason I was reducing my exposure to Macau, and the bearish view is that this is the first sign of trouble.

One of the dirty secrets of Macau is that junkets and casinos are used transfer money from China in excess of the $50,000 limit a citizen is allowed. VIPs go to a junket like Asia Entertainment & Resources, which provides a loan in China, and the player can gamble with the money. When the player cashes out, they take Macanese patacas and can transfer that into Hong Kong dollars and get millions of dollars out of China fairly easily.

This money-laundering scheme is one of the reasons around 70% of Macau's gaming comes from VIPs and by extension, junkets.

There's evidence that Chinese are fleeing the country, so it's not out of the question. The New York Times reported that the Organization for Economic Cooperation and Development reported a 45% increase of emigrants from China from 2000 to 2010. In 2011, 87,000 permanent residents from China came to the U.S., up from 70,000 a year earlier.

How do we know the real story?
So how do we know if this is great news for Macau or a sign of trouble ahead?

The easy answer is to watch gaming growth in 2013 and keep an eye on the mix. If VIP gaming slows from December's numbers, it's a sign that Chinese citizens have gotten the money they need to out of China.

Concerns about the stability of Macau's growth have been coming up for years, and so far there hasn't been anything to slow down the region significantly. I'll keep an eye on the trends over the next few months and we'll see if growth slows down or VIPs hit the tables less.

For now, Macau looks to be growing with no end in sight. The growth of the mass market was particularly encouraging in 2012, because through the third quarter, VIP baccarat play was falling off slightly. This mass market will help Cotai grow and make Las Vegas Sands and Melco Crown intriguing this year. 

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Read/Post Comments (8) | Recommend This Article (1)

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 January 14, 2013, at 3:04 PM, spokanimal wrote:

    Travis,

    While I believe that you have made a valid point about chinese capital flight, there is scant evidence that that point deserves a prominent position among the reasons for the surge in VIP gaming revenues.

    The surge in chinese economic metrics and the alleviation of uncertainty surrounding the new government deserves the lions share of the credit.

    The reality of capital flight is on-going, not necessarily unique to the nov/dec time period. The "crackdown" was restricted to a couple of detainments and the new politburo has gone to significant lengths to assure the populace that it's not an acute effort. There is more evidence that the VIP surge is due to relief over the lack of a crackdown that it is over a fear of an emergent crackdown in progress.

    I'm with the analysts who aren't sharing the magnitude of your speculation on this matter... and there's is an overwhelming lack of such a heightened concern.

    Spok

  • Report this Comment On January 14, 2013, at 9:50 PM, BenKeel wrote:

    Travis Hoium (author) states "One of the reasons December may have been stronger than recent months is that wealthy Chinese are likely getting money out of Macau before the new government is able to crack down on corruption and money laundering. I brought this up in November as a reason I was reducing my exposure to Macau, and the bearish view is that this is the first sign of trouble".

    Does that make any sense at ALL folks???

    "Wealthy Chinese are likely getting money out of Macau before the new gov't. is able to crack down on corruption & money laundering".

    How does "wealthy Chinese leaving" equate to a "stronger than recent months" number?

    Really???!

    C'mon Travis, you were bearish at $45 and now the stock's at $52. That's over 15% (in a week).

    No thanks Motley, I think I'll do this on my own.

    Larry

  • Report this Comment On January 14, 2013, at 10:43 PM, berg80 wrote:

    Trav,

    Why would any wealthy Chinese national risk the theoretical hold of 2.85% in Macau when he can move funds out of the country utilizing the underground banking system for 0.5%?

    You have picked a subject (Macau gaming) about which you obviously know very little and continue to write copious amounts of tripe.

    http://seekingalpha.com/article/1075031-is-a-crackdown-on-ma...

    GDP in China and VIP roll in Macau are highly correlated. That is why it is rebounding.

    Get a clue.

  • Report this Comment On January 14, 2013, at 11:01 PM, berg80 wrote:

    Trav,

    Have you considered that the vast majority of VIP's go to Macau just to gamble? And that if there was concern over a change in policy with the incoming regime they would have been going to Macau BEFORE it assumed power, not after.

  • Report this Comment On January 14, 2013, at 11:19 PM, JF125780 wrote:

    Travis, Even if you are correct about LVS, we are looking at a stock that is unvalued at $52. a share.

    Think long term when the law suits are settled and the company takes a big jump up and don't forget LVS has another opening this quarter, and a lot of investors bought in December ahead of the news, and yes some will sell when the opening is announced

    For me I'm in for the long term and I hope you will be too as this is going to be a profitable company for many years to come.

    Danny Kowkabany

  • Report this Comment On January 15, 2013, at 8:17 AM, berg80 wrote:

    Want a more rational, empirical explanation for VIP roll in Nov. and Dec.? Macau VIP GGR shows a 90% correlation with China GDP since 1Q09. Q4 GDP will likely be 7.8% compared to 7.4% in Q3.

    You are embarrassing yourself.

  • Report this Comment On January 15, 2013, at 9:28 AM, mbablitz wrote:

    Travis,

    I would put a different spin on it... China is a country that tells people what they are going to do and then does it. They did this when they said they were going to slow their economy and did. That sparked an overreaction with many pundits fighting to be loudest voice in the room with "the sky is falling" comments, spreading fear that China's economy was destined for a hard landing. Guess what? It did not happen. You are doing the same with this article.

    I would speculate that the corruption crackdown has more to do with the Bo Xilai scandal. http://www.marketplace.org/topics/world/why-chinas-bo-xilai-...

    Excerpt: The Chinese government is having a tough time controlling the biggest political scandal in that country in decades. The downfall of a charismatic and now former Communist party chief from the city of Chongqing named Bo Xilai. He was cashiered more than a week ago for what are being called serious violations of discipline -- basic stuff like corruption all the way up to and including his wife's alleged involvement with the murder of a British businessman. It's a textbook example of the kind of disruptive scandal China's party chiefs would rather avoid in the name of economic harmony. This is the corruption the new Government is talking about. Not Macau gambling.

    I would offer this article - http://www.macaubusiness.com/news/anti-graft-measures-no-thr... Excerpt: "Bai Zhijian, director of the Central People’s Government Liaison Office, said yesterday that anti-corruption measures in the mainland should not be regarded as measures to control the casino industry in Macau.

    “Measures against corruption and casinos are not the same matter,” Mr Bai Zhijian said, our sister publication Business Daily reports.

    “Every place across the globe is talking about anti-corruption and there are casinos everywhere. These are two different matters.”

    Mr Bai added he is not expecting new restrictions to be implemented for people in the mainland wanting to visit Macau."

    My spin would be China's VIP's were laying low until the new government was in place and they could assess what that the government's policies would be. That new government has said they would continue a hands-off policy regarding Macau.

    China would also not be spending a fortune on improving tourist transportation infrastructure from China to Macau, if it wanted to shut the place down. The 25 mile bridge from Hong Kong, bullet trains, and easing of visa restrictions are just a few of the things being done to get 1.3 billion people to the only legal gambling destination in China.

    In case you missed it, channel checks for January indicate another Gross Gaming Revenue record will be set. Then there's the Chinese New Year next month.

  • Report this Comment On January 16, 2013, at 3:15 AM, Goldenpattern888 wrote:

    Yet another uninformed article from one of the most ignorant writers on Macau. It's a shame that MF let him publish. I highly doubt he has ever been to Macau. He is not motley, just a fool. He still think Macau is money laundering. Sad.

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