LAST WORD

Exploring economic disconnects

By Sharon Singleton | Managing Editor, AGB

Just seven years ago during a panel at G2E Asia, analysts and operators alike were predicting that Macau would be a $100 billion market by 2021.

Their rationale was the improved product offering from the new properties coming online on Cotai and the fact that the Mainland was under penetrated with just 2.8 percent of its population visiting Macau compared with 16 percent of the U.S. population visiting Las Vegas.

Infrastructure has been improving, creating ease of access from a wider number of Chinese cities, while a rising middle class was forecast to double their disposable income during the period.

Roll on eight years and what has changed? Taking Covid out of the equation the same big picture economic drivers remain in place, but no one would suggest Macau’s gross gambling revenue will hit $100 billion.

In fact, forecasting where GGR in Macau might be five years from now is at present like pinning a tail on a donkey.

The uncertainty stems from the Chinese government and its vision for its own and Macau’s economy. Political risk was always going to bea factor for any investor in Macau given the city’s majority reliance on a sector its giant neighbour sees as a social evil.

That risk had been seen as worthwhile given the potential rewards. However, there had also been a presumption that the gaming industry was too important for Macau’s economy to be at serious risk from Beijing.

As China began to wield its axe on the Mainland, taking down its tech giants with a resulting loss of some $1.5 trillion off the shares, turning its sights on private education, clamping down on food delivery and ride sharing, Macau seemed to be curiously unaffected.

The focus was on the recovery from Covid and the potential for pent-up demand once visitors return. This myopic vision continued even as some of the biggest and brightest lights in the investment community held a public sparring match over whether U.S. funds should be investing in China given the current climate.

One long-term China watcher recently told AGB, “the checks and balances between the two seats of power, the government and the party, have been destroyed by President Xi Jing Ping and now politics have full control regardless of economic and social consequences.”

The uncertainty stems from the Chinese government and its vision for its own and Macau’s economy.

The day of reckoning for investors in Macau’s six gaming operators came the day the local government published its long-awaited amendments to the gaming law.

There was very little detail in the proposals, but they raised enough concern to wipe more than $18 billion off the value of the shares in the biggest-ever one-day fall for the sector.

Some analysts were swift to point out that the sell-off was overdone and the long-term drivers remain intact.

However, for an institutional investor sitting in one of the world’s financial capitals, suggestions that the companies may face restrictions on the distribution of capital, that there may be requirements for greater local shareholding ownership and direct supervision of operations was enough to hit the panic button.

There was also a clear inference that to regain a gaming concession companies would be required to invest more in non-gaming amenities and potentially in projects in the Hengqin Cooperation Zone to fulfill the Mainland government’svision to create a hub for international tourism and leisure in the Greater Bay Area.

This may turn out to be a great investment, but there is a niggling risk that companies may plough funds into a project to satisfy a political goal when that capital could produce a higher return if invested elsewhere.

Macau recorded gross gambling revenue of $37.7 billion in 2019 and according to Bernstein, the operators only need to hit 30 percent of that level to remain profitable at the EBITDA level. This is a clear indicator of the strength and resilience of the gaming industry.

However, at present there appears to be a disconnect between the underlying economic potential and the ultimate reality. Without further clarity as to what exactly the government means by the proposals put forward in its discussion paper, it’s difficult for an institutional investor to consider funnelling new funds into the sector.

Analysts from JP Morgan have pointed to the difficulties of putting a potential floor on earnings multiples and hence the stocks, saying that without further clarity it sees Macau as being “nearly un-investible.”

It expects it to be at least six months before the dust settles.