Why investors may be underestimating the pocket power of the Chinese gambler
What do a resort in the dusty deserts of Nevada and Macau, the ‘bright light city’ of the South China Sea, have in common? Both play host to one of the leisure sector’s biggest money-spinners — the gambling industry.
However, the recent slowdown in growth of gross gaming revenue in Macau has caused consternation amongst investors. We believe the island’s chips are far from down, though, due to structural and consumer trends in Asia, together with insights from the US.
Not so dicey
Recent months have seen gaming revenue grow at around 10% year on year, versus about 20% year on year in the first quarter of 2018. This has led to a sharp price decline within the sector, with the share valuations of some of the island's operators falling 30% from the highs of earlier this year.
We think these fears are misplaced. Summer casino revenues were probably dampened by the World Cup and the recent regulatory curbs on shadow lending in China likely reduced the availability of junket financing. Neither of these factors diminishes the long term growth prospects for Macau, in our view.
Going all in
It is important to note that gambling is illegal in mainland China, with little to no political support for legalisation. This means that the growing appetite for gambling among Chinese consumers is almost entirely funnelled into Macau. As Chinese consumers have prospered (see our recent research on the growth of the Chinese middle class) they have more cash left after basic expenses to spend on recreational activities like tourism and gambling.
Analysts estimate that of the Chinese population wealthy enough to afford a gambling trip, only 4% actually visit Macau. Comparatively, approximately 25% of American adults visiting a casino at least once per year. We expect that casino revenues in Macau will grow at high rates for several decades as Chinese people converge to western levels of casino gaming.
This growth will be supported by the enormous investments being made in infrastructure to better connect Macau with the rest of China. Within the next few months, China is expected to open the world’s longest sea bridge from Hong Kong to Macau. The $20 billion bridge spans 34 miles and will reduce the travel time to reach Macau from Hong Kong from three hours to just 30 minutes. After a busy day of shopping in Hong Kong, a Chinese tourist would be able to head over to Macau for a few hands of baccarat and dinner before returning to their hotel in Hong Kong to sleep.
Sector examples in Macau include SJM Holdings and MGM China. MGM China has recently opened a large casino in Cotai, the glitzy, new area of Macau. SJM Holdings will open its Cotai casino next year. We believe that the ramping up of these properties may drive good earnings growth in the years ahead. We don't favour walking away, as we think strong returns are on the cards as more and more gamblers show their hand.
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