Stocks markets may go up and down but no matter what the economy is doing people will drink, smoke and gamble.
It is reasoning familiar to those who celebrate “vice” stocks as recession-proof picks. But in recent months the casino industry has been testing the ‘sin-is-stable’ maxim to breaking point.
Take a trip to Las Vegas or Macau earlier in the year and you’d have been as likely to encounter an asset stripper as a real one. Visitor numbers and revenues were slumping, commercial and residential property prices had collapsed, and previously cashed-up casino operators were scratching around frantically to meet their financial commitments. Rather like their unluckier customers, in fact.
In Vegas the outlook is still gloomy. Gaming revenue and visitor numbers are well down, and unemployment is twice pre-crisis levels. Casino stocks have clawed back some of the ground lost during last year’s panic. But the consensus view is that the city won’t recover its vigour until the American consumer is feeling a lot more cheerful.
Macau, on the other hand, is starting to look spritely. After a poor opening to the year, third quarter revenues have just been reported as the best ever ($3.81 billion, up 22.3% year-on-year). Monthly receipts are three times the take in Vegas.
So it looks like baccarat (the Chinese game of choice) is very much back in business.
The American casinos are taking the opportunity to replenish their balance sheets. Wynn Resorts raised $1.63 billion in the Hong Kong listing of its Macau unit earlier this month, while Las Vegas Sands is planning a Hong Kong IPO of its own Macau business. MGM Mirage and local partner Pansy Ho are also said to be exploring fundraising options.
Of course, China has recovered quicker than most from the global economic malaise, and this has helped Macau. The city is still the only place to gamble legally in China (except for horse racing in Hong Kong) and has hundreds of millions of potential customers within a few hours travel time. Helpfully, most of them seem genetically disposed to a flutter.
So all hail to the city’s conquering casinos? Not quite, as Macau faces some serious challenges of its own.
Top of the list is the apparently mundane issue of visa policy. Macau’s dependence on Chinese visitors (many of whom are day-trippers) makes the prevailing visa regulations a hot topic in the city. In fact, they have become a totem for the city’s mood.
So last year, when Beijing tightened access for its citizens from neighbouring Guangdong province to one visit every three months, the enclave shuddered. Chinese visitors on individual visas fell by a third.
The reasoning was never made clear. Beijing may have thought the Macanese economy was growing too fast. Or it could have been trying to staunch the flow of public money being frittered away by corrupt officials. Some even saw envy that foreign operators like Wynn and the Las Vegas Sands were creaming too much profit from Chinese customers.
Then sometime in mid-summer the restrictions were relaxed again (albeit on an ad hoc basis and with no official fanfare). It became easier to get into Macau, visitor numbers rose and so did gaming revenues. The city started to feel good about itself once more, receiving 420,000 Chinese tourists during Golden Week in early October, a 2% increase on last year. Average (hotel) room rates were up 15.46% too.
Time for Macau bulls to get euphoric? Not exactly. Last week the Macao Daily News reported on comments from a Guangdong official that access would be reduced again, to allow for one trip every two months. Casino stocks fell immediately by 6-8%, although they recovered ground in the following days.
The central government may be making a point, after a couple of gangbuster months. The house may always win – but only if we let you.
Macau is also unlikely to sustain the growth rates of recent years, when visitors flocked to a rapidly expanding supply of new casinos. The Macau authorities are currently talking about the end of the era of “unlimited expansion”.
Still, if Chinese visitors do manage to get across the border successfully, the sinful stock strategy may also get a boost.
Famously, a visit to Vegas has come to involve a lot more than just gambling. Fine dining, shows and entertainment, golf courses and spas, conferences and conventions all compete for visitor attention.
But this seems to have lacked the anti-recessional pull of pure-play gaming. It has not kept people coming during tougher times.
Macau, on the other hand, is more focused on sin than sophistication. Sure, there are new hotels and restaurants, high-end shops and the occasional show. But the visiting hordes still seem most interested in the next baccarat session or trip to the sic bo table.
This will disappoint the local planners, who have long seen a future for the territory not just in gaming, but as a leisure and entertainment hub. It’s a “build it and they will come” vision that assumes that, as the Chinese get richer, they will insist on an entertainment experience similar to the Vegas one. And not just halls full of slot machines and blackjack tables.
But the territory’s gaming patriarch Stanley Ho has been saying for years that Macau should not simply be looking to graft the Las Vegas model onto a few square miles on the fringes of the South China Sea.
It is a self-interested argument. And at 87 years-old, Ho won’t be around long enough to find out if it is the right one.
But for the moment there are plenty of people inclined to agree with him.
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