Macau’s casino gambling business is showing signs of growth fatigue. The former Portuguese colony, the only place in China with legalized casino betting, is the world’s top gambling hub, with $34 billion in gaming revenue last year. Thanks to Chinese tourists crossing the border into the Special Administrative Region from the rest of the country, Macau has enjoyed torrid economic growth—gross domestic product increased 21 percent last year—and an unemployment rate of just 2 percent. Revenue growth for Macau’s casinos was even better, climbing 42 percent in 2011.
Macau, though, isn’t immune to the latest turmoil hitting the global economy. On June 2, the government announced that revenue at the city’s casinos was $3.3 billion in May. That’s an increase of 7.3 percent, compared to a year earlier. Sounds impressive—until you measure it against the 27 percent growth the casinos enjoyed in the first quarter from the same period in 2011. It is also the slowest rate of growth since the depths of the post-Lehman financial crisis in mid-2009 and it comes at a time when China’s economy is slowing. The Chinese government has set a GDP growth target of 7.5 percent this year, its lowest in eight years, as China’s export machine feels the impact of the European debt crisis.
Given that backdrop, June 5 wasn’t the most auspicious for Las Vegas mogul Steve Wynn to announce a major expansion in Macau. But there was Wynn, chairman of Wynn Macau (1128:HK), in the city telling reporters of plans to invest $4 billion in a new casino resort. Wynn put on a brave face when talking about the economic headwinds the project faces. “The economic growth of China has been so spectacular, so dramatic, it would be unrealistic to continue growing at that rate,” he said.
The location of Wynn’s new casino is an indication of the changes afoot in Macau. The center of the industry used to be downtown Macau, the small peninsula linked to Guangdong province. Now the Cotai Strip, an area of reclaimed land linking two islands off the coast of the peninsula, are where the action is. Cotai, where Wynn’s new casino will be, is already the site of four big resorts, including two owned by Sheldon Adelson’s Las Vegas Sands (LVS). “Growth prospects for existing Macau properties are less robust in the next few years, particularly for properties in the Macau peninsula,” Standard & Poor’s analyst Joe Poon wrote in a May 16 report. “We are seeing a shift in customers to Cotai.”
Another shift may be underway, too, as the slowing economy takes its toll on the high rollers who traditionally have made up the most lucrative part of Macau’s casino industry. VIPs typically arrive from China on trips organized by so-called junket operators, a mix of travel agents and money lenders who provide customers with cash to gamble in the casinos. The junket business is feeling the pinch from China’s slowdown, according to Donald Cheng Kwok Keung, an analyst in Hong Kong with Haitong International Research. “Junket operators [are] turning more conservative in extending credit to gaming partners,” he wrote in a report published on June 4.
In 2008, the last time China faced a global economic crisis, the government responded with a stimulus program worth $585 billion. Some of that money made its way to the gaming tables of Macau. A similarly sized stimulus package isn’t in the cards this time, according to Cameron McKnight and Barry Jonas, analysts at Wells Fargo. VIP growth will therefore probably lag behind the overall market this year, with VIP revenue growing just 12 percent, compared to 34 percent for the mass-market crowd and 20 percent growth in slot revenue, McKnight and Jonas wrote in a June 1 report. Overall casino revenues in Macau should rise 18 percent in 2012, Wells Fargo estimates.
With the global economy so weak, that sort of growth is nothing to sneeze at. Macau has simply grown accustomed to much higher numbers. Optimists say the good times aren’t over. The perceived weakness in May was partly caused by a high base effect from the previous year, plus a shortened Golden Week holiday around May 1. “We think the long-term fundamentals of the sector remain intact,” Nomura analysts Charlene Liu and Michael Shen wrote in a Monday report. They expect double-digit revenue growth to resume this month. Just don’t expect a jump of 42 percent.
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