Can a nearly 50% year-over-year decline in revenue ever be a good thing? In Macau, the answer is yes.
Gaming revenue was down a whopping 48.6% in February. Still, gaming stocks were up on the news, as the market was expecting even worse results.
It is worth pointing out that the comparison to February 2014 is especially difficult. The year ago period set an all-time record for gaming revenue and benefited from the full Lunar New Year, whereas the holiday extends to March 5th this year. Often, gamblers wait until the week after the big celebrations to make their visits to Macau, avoiding crowds and potentially pushing big gaming dollars into March.
Still, the industry is struggling, and gaming companies have to hope a turnaround is in sight.
Things are getting worse
After January, the hope was that the industry had stabilized. Gaming revenue had been flat at approximately $3 billion for the past three months, and there was hope that the Chinese New Year would drive a recovery. But the opposite was true, and gaming revenue fell to $2.4 billion last month.
Whether you're considering Wynn Resorts at the high end of the market, Melco Crown, or Las Vegas Sands and their focus on the mass market, everyone is hurting. The overriding question in Macau is: When will we see a bottom?
No end in sight
The problem for Macau right now is that no one knows. A government crackdown on corruption has been blamed for most of the recent weakness and still contributes to uncertainty in the region. If Macau was indeed just a funnel for laundering money, a problem I talked about more than three years ago, the crackdown on corruption and transfer of funds from China could indeed cause a long lasting impact on the industry. We could be nearing some sort of "new normal."
To make matters worse, Macau is in the middle of a building boom that will only increase gaming and room supply. Las Vegas Sands, Wynn Resorts, MGM Resorts, and Melco Crown are all opening new resorts in the next two years that could cannibalize existing properties.
Whether Macau grows or not will determine whether or not the new supply becomes a burden on the industry, and with the dismal February numbers, I do not have a lot of confidence that operators will be able to fill their new resorts.
A long, hard road for gaming stocks
There is still a lot to like about the Macau gaming market long-term. It is the only place in China where gambling is legal, and there are billions of people with relatively easy access to the region. As non-gaming offerings grow, it will also become an entertainment hub for the region, much like the Las Vegas Strip is today.
But reaching that more mature phase will take time, and the final product may not be as lucrative as we once thought. For investors, the lower revenue base may be something they need to get used to, because gaming dollars may not be coming back anytime soon.