FANTINI ’ S FINANCE
Macau ’ s Dilemma
Short-term gains in Macau are offset by the fact the market has fallen far from its peak
BY FRANK FANTINI
We haven ’ t been fans of Macau gaming for quite some time , and still aren ’ t .
The market peaked a decade ago and , while it has recovered from the Covid shutdown depths , it is still well below its all-time highs and shows no signs of returning to its 2013 and 2014 levels , though casino operators continue to throw development money into the market .
That Macau is so far below its peak is masked by the continuing focus by analysts on its progress since Covid . Take August as a recent example . Gaming revenues continued their doubledigit growth from last year , grabbing the headlines .
Yet the market remains almost 20 percent below its 2019 pre-Covid gaming revenue total of over $ 36 billion , and that is reported almost as a victory . But that was five years ago , already . In what other industry , or even what other segment of the gaming industry , would revenues 20 percent down over five years be considered positive ? But it ’ s worse than that . The year 2019 didn ’ t cap some kind of banner era . It was in the midst of a steady decline that had been occurring for a half-dozen years . In fact , gaming revenues peaked at $ 45 billion in 2013 . That made 2019 ’ s $ 36.6 billion a nearly 19 percent decline from the peak . And now it ’ s down another 19 percent from 2019 . Some recovery .
It may seem like a distant memory , but back in 2013 the astounding gaming revenue totals were touted by Macau casino operators as having just scratched the surface . Analyst after analyst bought the party line and produced tables and maps showing the tiny penetration of the mainland China market and extrapolated out mindboggling potential to be realized .
Now , if current projections of $ 29 billion this year are achieved , that will be a 36 percent decline from 2013 . And it will be treated as progress .
This doesn ’ t mean that growth won ’ t happen from here in Macau . And the future , not the past , is what investment is all about , after all . Further , profitability is helped considerably as low-margin junket revenue is converted into higher-margin premium mass play . It ’ s just that perspective is important .
Meanwhile , the stars are not aligned to return to $ 45 billion .
The world has changed . Mainland China is enduring an economic slowdown , and an actual recession in many sectors that previously created wealth that often ended up being spent in Macau .
Competing markets are growing , notably the Philippines and Singapore . And potentially more major competitors are on the horizon as Thailand mulls casinos and Japan will have casinos , though not until 2030 , at least .
The market remains almost 20 percent below its 2019 pre-Covid gaming revenue total of over $ 36 billion , and that is reported almost as a victory .
Meanwhile , casino operators are pouring money into non-gaming amenities and attractions in attempts to appease a local government that wants to diversify its tourism and a national government cool , if not hostile , to gaming . In other words , casinos are spending capital dollars in a shrunken market .
The national Chinese government now puts Macau in a region in which the economic development emphasis is to be on technology , not gaming . Now , perhaps similar to what we ’ ve seen in neighboring Hong Kong where the national government has pressed its will upon the local government , what the Communists might call “ right thinking ” appears headed for power in Macau .
That change may come in the person of Sam Hou Fai , a former judge who is the one announced candidate for Macau ’ s chief executive officer .
In what might have seemed an impossibility just a few years ago , Sam has openly declared his negative attitudes toward how big gaming has become in Macau , and expressed his desire to diversify the economy . It is language that could have been written by the Communist bosses of mainland China with nary a comma to change .
Macau casino stocks took a hit on the day after his comments . Those stocks already have been weighed down about concerns over the Chinese economy . That was a short-term reaction . Macau ’ s position as a gaming hub also is more long-term than a temporary economic slowdown on the mainland . And no Macau chief executive is going to kill the goose that lays golden eggs every day .
More likely , Sam will practice policies that play the long game , as the national Chinese government has so famously done in a number of arenas . Indeed , that MGM Resorts CEO Bill Hornbuckle was among the American CEOs hosted a couple months ago by Chinese President Xi Jinping was recognition of the importance and the legitimacy of the legal casino industry .
But , no doubt , the long game means diversifying Macau away from dependence upon gaming just as the national government , and now the likely incoming head of the Macau government , say .
So , casino companies will continue to earn profits in Macau as they invest money hoping to be able to maintain growth , and investing in non-gaming amenities and attractions as a defensive measure to appease the Macau and national governments .
For investors , the lesson isn ’ t to sell stocks of Macau operators at the drop of a headline or politician ’ s comment . It is to recognize that future success in Macau will be as much , or more , about managing for profitability than about growth .
Frank Fantini is principal at Fantini Advisors , investors and consultants with a focus on gaming .
18 Global Gaming Business OCTOBER 2024