Since Las Vegas Sands
After posting 42.2% growth in 2011, the question now is: How long can this growth last? That kind of growth rate isn't sustainable forever, and Macau will slow, probably considerably this year. And if gaming revenue growth slows, it will have a direct impact on Melco Crown
Where we've come from
Any discussion about how fast Macau is going to grow has to start with where we've been. Since 2009, gaming revenue has grown from around $1 billion per month to an incredible $3.1 billion last month. The following chart shows the monthly gaming revenue and a three-month simple average to smooth out some of the bumps.
Source: Macau Gaming Inspection and Coordination Bureau.
Another interesting thing is the amount that growth has slowed in recent months. From May 2009 to October 2011, the moving average declined month to month only three times. In the last three months, the same average has declined twice. Gaming revenue has been in something of a stalled pattern since May 2011, when Macau passed $3 billion in monthly gaming revenue for the first time.
There are also macro concerns to think about when looking at in Macau, both good and bad. China is growing much faster than the U.S. -- an estimated 8.25%, according to the International Monetary Fund in 2012. That will lead to more wealth, a larger middle class, and more potential revenue for resorts both on and off the casino floor.
But a hard landing for the real estate and banking sectors, along with continuing concerns in Europe, could affect Macau as well. Fitch Ratings has identified a hard landing in China as the No. 1 risk for the world economy in 2012.
Where are we going?
Macau's gaming growth has slowed, at the very least, and there are potential risks that could affect Macau from a macro level slowing growth further.
I think it's probably reasonable to expect some growth in 2012 gaming revenue, but the 42.2% growth from 2011 is a pipe dream. More realistically, investors should expect much more modest numbers, especially when comparisons get harder in May. In the second half of the year, I think high single-digit growth is probably a more reasonable expectation.
If growth indeed slows to these levels, investors may need to consider the premium they're willing to pay for gaming stocks. An enterprise value-to-EBITDA ratio of 12, like Las Vegas Sands trades at, is reasonable when a company is growing and adding capacity. But when the company stops building new resorts and growth in Macau slows, the multiples may need to come down a little.
A junket's role in Macau
Another interesting dynamic to watch is how casinos attract gaming dollars if growth slows. Las Vegas Sands has been focused mostly on mass-market gaming but is adding junket rooms that cater to high-end clients. As junkets like Asia Entertainment & Resources
Junkets only have so many casinos to deal with and only six concessionaires in Macau to negotiate with. If casinos do increase their competition for junkets, it's a zero-sum game that is tied to how much Macau grows. That's why I think casinos have the upper hand in Macau right now.
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