Macau has been having a horrible time of it. But 2017 may be a much better year, meaning the territory's beaten-up casino companies and their stocks could be about to post a substantial rebound.
The casino business has been on a losing streak since mid-2014. In mid-2015, the Macanese economy was posting an annualized decline of an eye-watering 23.7%, according to Trading Economics. That's right. Almost one-quarter of the territory's entire economy went up in smoke in a year.
The crackdown on corruption in mainland China has left members of the Communist Party terrified of getting caught splashing out more than their annual salary on one night of gambling, a Breitling, and a Birkin bag for the wife. Where, you may reasonably ask, did all that money come from, for a mid-level official from a small Chinese town?
Bribery, is the answer. I've sat at blackjack tables with men in shoddy suits carrying pleather manbags who have stacks of HK$10,000 ($1,300) chips in front of them. They don't exactly look like Internet millionaires or champions of industry to me. They may have been the guy who processes land sales, or issues health licenses for restaurants, or approves labor practices at a company. At every appointment, he would have his hand out for a little "bonus" above his regular pay.
It's an inevitable problem with a command economy and unelected officials. Power is disproportionately invested in the people who push pieces of paper around. Annoy them, and they can shut you down for good, no questions asked.
The recession in Macau has been intense. Imagine the kind of strain that losing $1 in every $4 of income puts on a society. Only, it didn't -- the full force of the decline was only felt by the casino companies and luxury stores. For everybody else, life went on as normal, perhaps a few people even welcoming a drop in the number of mainlanders clogging the city's crowded streets.
After 26 straight quarters of falling gross gaming revenue, that statistic turned positive in August. Even with a Signal 8 typhoon, Haima, barreling right into the Pearl River Delta, visitation figures and gambling revenue were both strong in October -- the most recent figures available. Premier Li Keqiang has also announced initiatives such as making Macau a clearing house for Chinese yuan for Portuguese-speaking nations, encouraging conventions, and pushing the development of non-casino attractions.
Those plans are designed to support Macau's economic development. Beijing would like to see Macau diversify away from "gaming" into an all-purpose leisure-and-meetings location, a move Las Vegas has so successfully made. On the gambling front, the 40-odd casinos are very keen to shift away from the "VIP" segment of whales, some backed by suspect credit from Chinese loan sharks or triads to the mass market. Mass market is far more profitable since there's no commission to pay, unlike with VIPs brought in by the junket operators who organize the credit.
Standard & Poor's has just put out a report on the industry, "Macau Gaming: The Cards Look Right For A Recovery." Their basic premise is that the rebound will come thanks to new casinos, better infrastructure linking to mainland China, and stabilized regulations. Gaming revenue, having fallen 34% in 2015 and an anticipated 3% to 6% this year, should grow as much as 10% in 2017.
S&P estimates that earnings from the mass market range between 30% and 40%, whereas VIP margins are only around 10%. It expects the two segments to be evenly matched in terms of gaming revenue next year, up from less than 30% from the mass market in 2011.
Wynn Resorts (WYNN) recently opened its $4 billion Wynn Palace to supplement its existing, and highly successful, casino. The company sets the standard for luxury, has some of the top-performing stores per square foot in the world for the luxury brands in its shopping areas, and commands some of Macau's highest room rates, starting at $250 for a standard room per night.
Melco Crown Entertainment (MPEL) has a new resort in the form of Studio City, which opened with great fanfare and a $70 million, 15-minute film, The Audition, directed by Martin Scorsese and starring Leonardo DiCaprio, Robert De Niro and Brad Pitt, as well as the director himself.
S&P believes earnings will improve most for Wynn and Studio City because they have better amenities and more non-gambling entertainment options. That applies less to Melco Crown's other operations, Las Vegas Sands (LVS) and MGM Resorts International (MGM) , S&P believes. It is also watching how sensibly the companies manage capital expenditures and of course the feed-through to their debt levels and credit rating.
With much of the investment for newly opened or upcoming casinos already made, S&P believes capital spending by all six casino concessionaires will fall $1.5 billion next year, compared to this, alleviating pressure on cash flow and leverage. The companies have sufficient liquidity to withstand even a prolonged industry downturn, to the rating agency's mind. They have used the downturn either to pay special dividends to shareholders or buy back shares, both positive for holders of their stock.
I stayed at Studio City a few weeks back on a "grave sweeping" trip to visit the cemetery storing the ashes of my father-in-law. It was pretty impressive, with a huge pool area including a river ride that delivers part of the experience that Beijing would like to see the city provide. There's a Ferris wheel in the shape of an 8, the luckiest number to many Chinese, in a hole through the middle of the main building. There's a very popular magic show as well as movie-themed rides such as the one based on the Batman movies.
I also wandered over to The Parisian Macao, a new casino resort from Las Vegas Sands. That is more mass-market than Studio City, particularly in terms of its stores. Nevertheless, it's pretty eye-catching, with its half-size version of the Eiffel Tower.
Next year should see MGM Resorts open the MGM Cotai. In 2018, Stanley Ho's SJM Holdings (SJMHY) should deliver The Grand Lisboa Palace. SJM, which had a monopoly on Macau's casino business until 2002, has really had to up its game. When I first visited Macau, The Lisboa - the flagship casino at the time - had coffee-stained tables with people standing four deep to bet on the handful of gambling slots. In a system I found highly frustrating, whoever put down the biggest bet got to call the shots, even if you were sitting at the table with your money down, too.
The Sands changed all that when it entered the market, soon followed by Wynn, MGM and Melco. Hong Kong-based Galaxy Entertainment (GXYEY) , which opened an extension to the Galaxy Macau last year, soon joined them. The whole gambling experience morphed into something approaching Las Vegas glitz, with Asian features. The waitresses bring oolong tea and coffee rather than cocktails to the tables. The vast majority of tables are given over to baccarat, the runaway favorite among Chinese gamblers.
The number of hotel rooms rose 4,700 with the addition simply of the Wynn Palace Cotai and The Parisian. That brought the total stock to more than 35,000 rooms, up from 20,000 in mid-2011. But occupancy has remained persistently between 80% and 90%.
Next year will see the completion of a new ferry terminal on the island of Taipa, near the Cotai Strip -- the equivalent of the main run in Las Vegas. The Macau airport is also boosting capacity from 6 million passengers per year now to up to 7.8 million in 2017. The following year, Macau will get a railway extension feeding through to Zhuhai, the mainland city just across the border, and Guangzhou, the capital of Guangdong Province.
In 2019, a bridge linking Hong Kong to Macau and on to Zhuhai is due to open. The controversial billion-dollar project, built over waters home to the highly endangered Chinese white dolphin, should cut the link from Hong Kong airport to Macau to less than 30 minutes from just over an hour now. Macau should also get the first section of its long-delayed light rail, linking the Strip with the new ferry terminal and the airport. At the moment, your only options for getting around are the highly endangered Macau taxi, the ubiquitous casino coaches, or by foot.