Macao gambling revenue fell in 2019, marking the end to the Chinese peninsula's two-year recovery. A slowing economy, rising trade war tensions with the U.S., political unrest in Hong Kong, and a slowdown in visits from VIP gamblers combined to cause the first dip in annual revenue since 2016.

While there were a couple of one-time events in December to make it the worst month of the year with gambling revenue down double-digit percentages from the prior year, the region remains vulnerable and investors shouldn't expect a quick rebound in 2020.

Baccarat chips

High-stakes baccarat is the game of choice for Macao's high rollers. Image source: Getty Images.

Betting against a comeback

Macao went from boom to bust in 2014 following China's crackdown on VIP junket operators. These tour operators partnered with casinos to bring high rollers to the latter's resorts, plying them with amenities and loans for money to wager, and in return, the junket operators received a percentage of the amount their VIP guests bet.

The tough enforcement caused VIPs to stay away from the only legal place to gamble in China, while the casinos scrambled to comply with an edict from Beijing to pivot away from high rollers and toward a more mass market audience.

Gross gaming revenue (GGR) plunged from 351 billion patacas (the local Macao currency, or around $44 billion) in 2013 to less than 231 billion patacas ($28 billion) the following year. The region hit its nadir in 2016, generating just 223 billion patacas.

But with the opening of Wynn Resorts' (NASDAQ:WYNN) new mass market Palace resort in August of that year in Cotai, followed by Las Vegas Sands' (NYSE:LVS) Venetian the next month, the seeds of recovery were planted.

Gambling revenue jumped 19% in 2017 and 14% in 2018, and casino operators were reporting solid results from the region again. But in 2019, it was clear the momentum could not be sustained as eight out of 12 months saw GGR fall from the prior-year period. And December was the worst with GGR down 13.7%.

Chart of monthly gross gaming revenue in Macao

Macau Gaming Inspection & Coordination Bureau.

Travel restrictions imposed

Although Macao remains weak, the magnitude of the decline had more to do with external factors than with the peninsula's gambling market itself. In particular, President Xi Jinping of China visited Macao in the middle of December to celebrate the 20-year anniversary of Portugal turning over the protectorate to China in 1999. 

Temporary travel restrictions to Macao were imposed for security reasons, and potential new benefits to be bestowed on the region during the visit didn't materialize.

Xi had praised Macao for not becoming unruly like Hong Kong. It was expected that he would announce China would be creating a financial hub in Macao as a reward and to wean it off of dependence on gambling revenue, as well as granting new land to the district. Neither policy was forthcoming.

New competitors rising

There is hope for a second recovery in 2020, though it's not likely to be robust. The U.S. and China are set to sign the first phase of a new trade agreement, and President Trump has promised to hold off on imposing a new round of tariffs on Chinese goods.

But any growth is likely be more weighted to the back half of the year and will be based on the easy comparisons to last year, rather than a material improvement. Also, the region would still be subject to tumult should trade negotiations break down again.

Furthermore, the continued pressure to break from gambling and VIP gamblers will see high rollers look to nearby emerging markets for their action. For example, Macao's largest junket operator, Suncity Group, is opening a new resort in Vietnam early in 2020, and it will undoubtedly steer a lot of VIPs there instead. 

CEO Lawrence Ho of Melco Resorts & Entertainment (NASDAQ:MLCO) called Suncity's announcement "a shock to the market," though he believes the decline it wrought will moderate and lead to a muted recovery.

Still, Japan could also become a major competing destination since it is expected to be the world's second biggest market after Macao when the first gambling resorts open in Japan over the next few years.

Betting against the house

December may have been the low point for Macao, but it is now a mature casino market like Las Vegas and Atlantic City, and investors shouldn't make any bets that it will see double-digit gains as it did in years past.