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Investing in Macau’s Casinos – A Good Game?
Aspire, Thought Leaders | 20 July 2015
By: Louis Wong
Articles (12) Profile

Share prices of Macau gaming stocks, which have been under pressure for more than a year, seemed to have finally bottomed out. Take Galaxy Entertainment Group (0027.HK) as an example, its share price started to decline after peaking out at about HK$83 in January 2014 and fell to a recent low of HK$ 29.4, representing a 64.6 percent loss from its peak. But since then, its share price has rallied more than 20 percent.  MGM China’s (2282.HK) share price rose even more sharply compared to Galaxy. It had rallied more than 37 percent from a recent low of HK$12.62, based on the closing price of HK$17.3 on 13 July.

Decline in Gaming Revenue is Slowing

According to statistics provided by the Gaming Inspection and Coordination Bureau Macau SAR, Macau’s gaming revenue peaked out in February last year after hitting MOP 38 billion and has been on a consistent downtrend. Monthly gross revenue declined to MOP 17.3 billion in June this year, the thirteenth consecutive month of decline and also the lowest gaming revenue since November 2010. For the second quarter of 2015, Macau’s gaming revenue fell 37.4 percent compared with the same period last year. But if we look at year-on-year decline each month, we will find that revenue declines improved modestly in the second quarter from 38.8 percent in April to 37.1 percent in May to 36.2 percent in June. With a low-base effect, revenue decline in the second half this year is expected to moderate further to within 30 percent.

New Visa Policy may Boost Tourism

On 1 July, Macau announced revisions to the transit visa policy that was imposed 12 months ago, following pressure from Beijing. Effective from 1 July 2014, the maximum number of days that Chinese passport holders with transit visits can stay in Macau was reduced from seven to five. After the latest revision, mainland visitors can again stay for up to seven days en route to a foreign destination and for two days on the return leg.  Whether this change of policy will help attract more tourist arrival from mainland China remains to be seen, nevertheless, it indicates a measure of support for Macau from Beijing and can be viewed as the first sign of policy easing. There may be more supportive policies in the second half for Macau.


Smoking Ban can be a Wet Blanket

However, there is still a key overhang–the casino smoking ban. The Macau Legislative Assembly has approved a first reading of a bill to ban smoking inside all casinos. The ban is expected to be implemented early next year after the issue of whether smoking lounges inside casinos should be allowed is debated.  A third-party report commissioned by Macau’s six casino operators estimated that high-stake gamblers would reduce their trips to Macau by 17 percent and cut their length of stay after the smoking ban is implemented. If the report’s projection is correct, the junket operators would bear the brunt as their income are heavily reliant on high rollers. Thus, the Macau Junket Operators Association (AMJEM) responded by threatening that its members would quit Macau and invest in the gaming industry in Southeast Asia if the full smoking ban results in a further decrease in the VIP gaming business. According to gaming statistics cited by the AMJEM, the revenue of the VIP gaming segment dropped to 50 percent of the gaming industry’s total revenue last year from 70 percent previously.  In view of the strong opposition from the industry, there are reports that the Macau government may soften the smoking ban by allowing casinos to retain smoking rooms if they can prove that the health of employees and patrons is protected.

Where to Place the Bets

If the abovementioned overhang is removed and mainland Chinese visitation improves, Galaxy will be my top pick in the Macau gaming sector. Following the formal opening of Its Galaxy Phase 2 and Broadway Macau on 27th May, Galaxy achieved the biggest market-share gain in the mass market in June at the expense of Sands China (1928.HK) and incremental market-share gain in the VIP segment at the expense of Wynn Macau (1128.HK) and Melco Crown. Its total market share increased by 6.4 percentage points, giving it a 25.1 percent market share. Sands China has reported a drop of 4 percentage points, while Melco Crown and SJM (0800.HK) have each reported a drop of 2 percentage points.

Louis is one of the most experienced fund managers in Hong Kong and has more than 25 years of solid experience in the financial markets. He employs a strict criteria for choosing his stocks, which is deeply insistent on having a thoughtful and sophisticated analysis of the company before making any investment decision.

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