Macau's gaming industry seemed to be on the mend after revenue jumped an impressive 14% in 2018 to $37.6 billion, and every month saw growth year over year. Three months into 2019, it looks like the growth trend may already be over. January revenue dropped 5% from a year ago, and after a 4.4% increase in February, there was a slight 0.4% decline in March. For the year, gaming revenue is down 0.5%. 

For gaming stocks with exposure to Macau, the market's growth is necessary just to absorb new capacity. MGM Resorts (MGM 0.66%) opened MGM Cotai last year, which was preceded by expansions from Las Vegas Sands (LVS -2.00%) and Wynn Resorts (WYNN -0.60%). Over the next two years, SJM's Grand Lisboa Palace will open, and Galaxy plans to open another phase of its massive resort in the Cotai region. Without growth, the market may start to cannibalize itself, and earnings could drop as a result. 

Macau's skyline during the day.

Image source: Getty Images.

We've been here before

Macau has a long history of going through sweeping growth and contraction trends. You can see below that since 2012, the region has gone from boom to bust to a modest recovery. 

Macau's monthly gaming revenue from January 2012 thru March 2019

Data source: Macau Gaming Inspection and Coordination Bureau. Chart by the author. SMA=simple moving average.

You can also see that slowing growth isn't a new trend; it's been happening for about the past year. This is despite the opening of MGM Cotai and the maturing operations of The Parisian and Wynn Palace. 

If these new resorts aren't enough to excite visitors to spend more in Macau, the new property by SJM and the eventual completion of Galaxy's expansion may not do much to excite them either. More macro changes may be needed. 

What could drive growth (or contraction) in Macau

The two overarching drivers of Macau's gaming revenue are the economy and Chinese government policy. With the global economy growing, more millionaires and billionaires have cash to spend in Macau, and it's those high-rollers that still drive about two-thirds of the region's gaming revenue

Chinese policy has been a bit more fickle. The decline in revenue that began in 2014 was due to a crackdown on corruption in China and restrictions on visas going into Macau. Some of those policies were eased in 2016, leading to growth the last two years, but they can be reversed anytime. 

If there's going to be one thing that drives growth or contraction in Macau, it will be Chinese policies related to the region. And the flat revenue we've seen for most of the past year doesn't give any indication China is opening up policies that could supply the needed gaming growth. 

Be cautious in Macau

For now, there's reason to be cautious with Macau's gaming stocks. If the region doesn't return to growth, we will likely see revenue and EBITDA fall on a casino level as more properties hit the market. And more competition means more promotions to attract customers, which will further squeeze margins. 2019 isn't shaping up to be a great year for Macau's gaming stocks unless something big changes in the region.