Little Luck With Genting Singapore? Try Switching To Macau Casinos!
by Jade Lee 28/06/13 6:45 pm

Genting Singapore (GS) has temporarily lost its shine hammered by its declining VIP segment. Painting a different picture, Macau’s gaming industry continues to show strength with revenue for the month of May surging 13.5 percent mainly driven by expansion of various casino operators. Perhaps, it is time for us to switch to Macau’s gaming industry?

Two years on, investors are still wondering whether GS is another stock that was long on promise but not results. In fact, GS’ financial performance has been as disappointing as its share price with the firm posting yet another weak quarter due to lower VIP win rate despite record high VIP betting volume. Parade of bad news continue with analysts now shifting sentiments from “bullish” to “bearish”, saying that the performance for GS’ VIP betting volume is not sustainable.

Yet, things are not the same for its peers in Macau. Remarkably, the region’s gaming industry has again showed its strength with revenues for the month of May jumping more than 13 percent to over US$3 billion. This came second only to casino revenue that was generated in the Chinese administrative region in March.

Macau Offers A Positive Glimpse Into VIP Segment
China’s slowing economic growth and tighter gambling regulations have indeed affected the spending of Mainland gamblers. But then again, that does not mean it is an issue for the high-end consumers who can afford to gamble.

In truth, gaming revenue in Macau is showing signs of improvement, with the region reporting gaming revenue that is six times larger than that of the Las Vegas Strip at US$38 billion last year, mainly contributed by “baccarat” card games from the high-rolling Chinese VIPs. Overall, Macau casinos raked in gross revenues of US$3.7 billion (up 13.5 percent) in May, with The Secretary for Economy and Finance of Macao SAR further forecasting Macau’s casino gross gaming revenue to reach US$41.5 billion for this year.

Hence, there are plenty of reasons to think the good times will continue to roll.

Seconding the view, MGM China Holdings expects the city’s VIP business will continue to pick up “slightly” and a double-digit growth in the segment for the industry is “sustainable”. Likewise, billionaire Lui Che-Woo, chairman of Galaxy Entertainment Group (Galaxy) expects to see a recovery in its VIP business this year, adding that the firm relies on its VIP rooms to generate the majority of its revenue at the Galaxy Macau Resort in Cotai, the StarWorld Hotel and Casino in downtown Macau.

Having said that, it is important to take note that there is no certainty in this traditionally volatile VIP segment due to the different penetration rates between VIP and mass-market segments. To put it simply, the VIP market is largely dependent on a few numbers of players while mass-market lies on a big pool of investors where the increase in new players will be more than enough to offset the decline in existing players’ spending. Evidently, Macau’s mass-market gaming revenues managed to report a roughly 30 percent jump despite China’s economic slowdown in 2012.

Making Money In Sin
Setting Singapore casino aside, the gaming sector in Macau does look attractive given its strong operating cash flow and attractive dividend yields (Table 1). So, how can one invest in Macau gaming stocks?

Table 1: Performance Of Macau And Singapore Gaming Stocks (Figures are based on latest fiscal year)

Source: FactSet

One way to invest in these stocks will be through an exchange-traded fund (ETF) – Market Vectors Gaming ETF. Tracking 46 different firms or so called the most liquid companies in the global gaming sector, the Market Vectors Gaming ETF is dominated by casino resorts operating in Macau such as Las Vegas Sands (LVS), Wynn Resorts, Galaxy and MGM Resorts International. Jumping more than 20 percent since 2011, the ETF has also started to offer attractive dividend for FY11 (US$0.662) and FY12 (US$1.382) following two years of nil dividend.

However, for those who are bullish on Cotai Strip region, direct purchase of Melco Crown Entertainment, Sands China and Galaxy could be a better play. All three casinos have seen rising revenues in their Cotai casinos on the back of strong visitor growth in 2013. With analysts now expecting Cotai to overtake the Macau Peninsula in three to five years’ time, this could be a good reason to accumulate shares that enjoy a solid edge in the Cotai Strip.

Founded by billionaire Lui Che-Woo, Galaxy remains our favourite given its growing presence on the increasingly popular Cotai Strip. The firm said it plans to spend as much as HK$60 billion to expand its operations on Cotai Strip which mainly targets VIPs and the high-rollers. To opt for more balanced development in Macau, Galaxy has also recently acquired Grand Waldo for HK$3.3 billion to further attract mass-market gamblers. Armed with a strong cash hoard of HK$16 billion as at 31 March 2013, we believe chairman Lui will continue to acquire land when opportunities arise. The newly added Hang Seng index component stock currently trades at HK$38.50, which is a 24.7 percent jump since beginning of the year.

For those who prefer US titans, Wynn Resorts and LVS would make good addition to your list. Notably, on top of Wynn Resorts’ and LVS’ ordinary dividends, both casino operators have also paid large special dividends (US$7.50 and US$2.75 respectively) in 2012 that set yields above 6 percent. Not to mention, analysts expect both firms to maintain a similar payout for 2013.


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