The Chinese gambling mecca of Macau has seen a rough few years after the Beijing government's 2014 crackdown on money laundering and government corruption, and it looks like 2016 will witness more declines in revenue. To any investors thinking about buying shares of the much-punished gaming companies now because that key market can only go up ... it's not quite that simple.
In this clip from the Industry Focus: Consumer Goods podcast, Vincent Shen and Sean O'Reilly explain why, even at a pretty clear bottom like this, investors shouldn't just jump into companies involved in Macau expecting a fast ride on some big wave of improvement.
A full transcript follows the video.
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This podcast was recorded on April 12, 2016.
Vinent Shen: The government in Macau has forecast another decline for 2016. 2015 was 230 billion patacas [$28.8 billion], they're expecting for 2016 about 200 billion [$25 billion]. A lot of people are asking the question now: Are things bottoming out? We've seen some of these companies stocks have recovered year-to-date, I think because investors are getting bullish, especially with the more positive result in the beat in February, they think maybe this is the sign that things are going to be on an upswing. But that's really hard to say. There's a lot going on. The thing is, with each new resort, you're adding a ton of supply. So, room revenue is often the second-largest source of income after gaming.
Sean O'Reilly: Ah-ha! Therein lies the rub.
Shen: It's often the second-largest source of revenue for these businesses, but the thing is, tons of new supply coming up soon, as each property is completed. And, a trend that we've also seen is, falling occupancy rates and falling average daily room rates. So that hurts them. Some people see it as positive, but at the same time, Studio City has the buzz right now because it's the newest. Then, Wynn Palace will have the buzz, because it will be the newest.
O'Reilly: And in five years, it'll be ...
Shen: And after that, you'll have the Parisian, and after that, you have MGM (MGM 0.99%) Cotai ... there's several new resorts coming in 2017 as well that we can cover on another episode. This is just the tip of the iceberg.
O'Reilly: It seems to lend itself to the idea that, maybe as a whole, the bottom is occurring. But per casino, more pain may be coming.
Shen: Yeah. The thing is, are we going to reach the peaks we saw in 2014? Probably not, not for many, many years. So, even if you say, "OK, I agree with the idea that the market is stabilizing and these losses are stemming off," the market is now going to be spread among more and more tables, more and more slots, more and more rooms. And that really makes you have to consider how these companies are positioned. You have to look at each company now and really think, are they marketing themselves well? Are they going to hit the segments that will be the biggest money drivers for each business? I think that also has a lot to do with why Macau is capping the number of table games, for example, at each new resort. Otherwise, the pie is just being split into thinner and thinner slices.
O'Reilly: Cool. Alright. So, bottom line, the bottom may be in for the market as a whole, but for shareholders of all these companies ... tread carefully? (laughs)
Shen: Also, for me personally, I think Macau is probably in my top three places I'd really like to visit because the development there is incredible, and I've heard so much about it from people who have been there who say it's worth the visit, even if you're not a gambler, like I said, the entertainment options, the shopping ... it's definitely a sight to be seen.
