Macao casino revenue fell 8.6% in August, the second straight month it was down. Gambling revenue has been down for five of the eight months of 2019 so far.

While no one expected the casinos to maintain the double-digit growth rates they were enjoying after coming out of their deep, two-year decline, the steady drumbeat of weak results and disconcerting economic news in China could signal that the gambling enclave is heading back into a recession.

Chart of Macao monthly gaming revenue.

Data source: Macao Gaming Inspection & Coordination Bureau. Chart by author.

Profits are higher

Certainly on the surface, it doesn't appear that way. While Wynn Resorts (NASDAQ:WYNN) has reported lower adjusted property EBITDA at its Macao casinos over the first six months of 2019, Las Vegas Sands (NYSE:LVS), MGM Resorts (NYSE:MGM), and Melco Resorts & Entertainment (NASDAQ:MLCO) have all reported increases. 

Although the gains (and losses) weren't uniform across all properties, particularly for the winners, the increases occurred at their larger, more important resorts while the losses typically occurred at smaller, less crucial properties.

Macao-Based Resort Adjusted Property EBITDA

Resort

First Half 2019

First Half 2018

Las Vegas Sands

$1.62 billion

$1.54 billion

Melco Resorts & Entertainment

$706 million

$611 million

MGM Resorts

$362 million

$272 million

Wynn Resorts

$442 million

$481 million

Data source: Company SEC filings.

Even so, resort operators with substantial exposure to Macao should be concerned with how the market is progressing because there are also macroeconomic factors that could hurt casino stocks' results.

Global tensions will take a toll

Arguably the biggest issue, for the immediate future anyway, is the situation in Hong Kong as pro-democracy protesters show no signs of letting up.

Visits from Hong Kong to China, one of the crucial entry points to the peninsula, grew only 16% in July, the latest period available, compared with 23% from January through June. Even the rate of growth from the mainland to Macao slowed in July to 18% from 22% over the first six months.

Perhaps more problematic in the longer term is China's economy, which is slowing down quickly. China's exports fell unexpectedly in August as trade tensions with the U.S. grew. 

Exports were down 1% for the month, a dramatic change from the 2% gain analysts had expected, and the worst performance since June, when they dropped 1.3% (exports had risen 3.3% in July). Trade with the U.S. is also withering. Exports to the U.S. dropped 16% in August following a 6.5% decline in July, and China accepted 22% less imports from the U.S. last month than it did a year ago.

Yet it's not just the U.S. that China is having a problem with. Imports from Europe and other countries are also in decline, falling for the fourth straight month last month and indicating that Chinese consumers are having a more difficult time.

Macau skyline at night

The City of Dreams and the Venetian resort's canal in Macao. Image source: Getty Images. 

More clouds on the horizon

That might not register right away in the casinos, but the longer-running weakness in the VIP market, evidenced by Wynn's results, but which has largely been masked at the other resorts by strong mass premium customers, or tourists who don't make the VIP cut but still drop a lot of money, may start to trickle down to them and the lower end mass market.

New U.S. tariffs on Chinese goods took effect on Sept. 1, another round will go into effect on Oct. 1, and a third will hit Dec. 15. Although trade negotiators are working to resolve the issues, the continued impact will eventually fall on the casinos, and will likely jeopardize the resorts' ability to bounce back in the final months of the year.

China's economy was already slowing before the trade war; the tit-for-tat tariff situation has only exacerbated the problem. Coupled with growing unrest in Hong Kong, it's possible August's gaming revenue drop was a harbinger that Macao is slipping back into recession.