FT Analysis Dark clouds hang over local gaming industry

Last October, casino mogul Steve Wynn told analysts on an earnings call that it was unclear if Macau’s unexpected summer lull in revenue growth was a “squall or the rainy season”.
Three months on, the answer is clearer: the dark clouds for the gaming industry in the southern Chinese territory look like they are here to stay.
Macau’s explosive decade-
long boom appears to have run out of road thanks to Beijing’s anti-corruption campaign. High rollers have been scared off, double-digit revenue growth has gone firmly into reverse and casino shares have switched from darlings to duds. Few analysts expect the situation to improve soon.
Gambling has been a way of life in the small sea front city since it was legalised in 1847, and Macau still hosts major events in horse, harness and greyhound racing.
More recently the city of around 600,000 people has become the world’s top spot for casino gambling. In 2013, gross gaming revenue in the former Portuguese colony topped $46bn, having grown 18 per cent year on year and tripling since 2009. Punters now bet seven times more in Macau than they do on the Las Vegas Strip.
Investors went along for the ride, with gaming stocks consistently among Asia’s best performers from the start of 2012 to the end of 2013. During that period shares in SJM Holdings doubled in value, Sands China trebled, and MGM China soared by 265 per cent.
At the start of last year, the good times were expected to roll on – consensus forecasts were for a 20 per cent increase in revenues.
But last summer, Macau’s lucky streak finally ran out, both for the gaming companies and their shareholders. Monthly gaming revenue growth slipped into negative territory for the first time in June and slid heavily through the rest of the year.
“The street underestimated policy risk,” says Billy Ng, gaming analyst at Bank of America Merrill Lynch, adding that “visibility is still very poor”.
December was Macau’s worst month for total revenue since 2011, having fallen by 30 per cent, increasing the likelihood of another disappointing earnings season from the sector. The most recent numbers from Wynn Macau showed revenue fell 5.6 per cent in the third quarter.
The equity market has been unforgiving in the face of stalled growth. Shares in Galaxy Entertainment have halved over the past 12 months, while Macau Legend – one of the smaller players in the sector – has dropped by two-thirds.
Revenues are pointing even lower during the first half of 2015, says Mr Ng, who predicts a 10 per cent drop for the full year.
Macau’s slowdown is just one side-effect of Beijing’s high-
profile anti-corruption campaign. Under Xi Jinping, who took over as president in March 2013, Chinese authorities have targeted officials and businessmen alike, from the most powerful “tigers” to the lowliest of “flies”.
According to research from the Polytechnic Institute of Macau, around half the VIP gamers in 2010 were either government officials or executives at state-owned enterprises.
“The biggest issue that caught everyone by surprise was the anti-corruption campaign”, says Michael Ting, a gaming sector analyst at CIMB. “The ultra high-end guy isn’t coming to Macau any more.”
The reliance on high-rolling punters has left casinos sorely exposed to government policy. Mr Ting expects “no let-up” in the graft campaign and says it is likely to remain the “biggest cloud over the sector” this year, a view echoed by lawyers familiar with such issues.
Macau also faces other challenges, including tighter visa rules that shorten the amount of time Chinese visitors can stay and lengthen the gap required between trips. That further deterred VIP clients, many of whom had been making monthly trips to Macau, say analysts.
The introduction of a smoking ban on mass market gaming floors – something likely to be extended to VIP rooms this year – may also have deterred punters.
Along with falling revenue, casino operators have had to contend with rising labour costs. Staffing expenses rose 19 per cent in the first half of last year compared to 2013, according to CIMB estimates, eroding margins. A chronic shortage of workers meant companies had little choice but to meet demands through share awards or additional cash payments in order to stave off strikes.
Joohee An, portfolio manager at Mirae Asset, is positive on Macau over the long-term but expects the coming year to remain tough.
“The new government is very, very decisive. This is not a short-term trend,” says Ms An, referring to the impact of the corruption campaign. “It will get better eventually, but it will take time.”
There is a hint of a silver lining to the grey clouds. A bridge linking Macau with Hong Kong, due to open next year, could help increase visitor numbers, while any improvements in the Chinese economy should boost tourism and bet spending.
In the second half of this year, a handful of new casino developments are due to open, adding much-needed hotel space. Occupancy rates on the key gaming strip have been running close to 100 per cent over the past year. The hope is that, as with previous debuts, new rooms will generate new demand.
But while analysts expect the new hotels to fill up fast, the key question is, “what kind of player will fill that room?” says Mr Ting. “The low-end guy will stay in the hotel room, but he’s not going to have the same losses on the gaming floor.”
Or as Ms An puts it: “Casino operators cannot just make money from the little-ticket guys.” Josh Noble, Hong Kong, MDT/Financial Times exclusive