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Back on the Switch

China moves to again curb the inexorable visitor influx to Macau

Friday, 13 November 2009 00:00
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The fact that China controls Macau’s ‘on-off’ switch when it comes to the number of Mainland visitors allowed into Macau, and therefore the rate of annual growth of the city’s gaming market, is now generally understood by investors.

How China will operate that ‘on-off’ switch now and in the future is less well understood—even by the people who live and work in the Macau market.

The uncertainty about this was reflected in the Hong Kong stock market’s twitchiness over locally listed Macau gaming stocks last month. On October 15th, they dropped between six percent and eight percent after local media reported Beijing had instituted another clampdown on travel by its citizens to Macau from the nearby Mainland province of Guangdong.

Starting early October, individual travellers from Mainland China to Macau can apply for visas only once every two months, according to the media accounts. That compares to the previous policy of once a month, Chinese language newspapers said, indirectly quoting the Guangdong Public Security Department.

This is being widely interpreted as an attempt by the Chinese authorities to cool down an again overheating market. Gross revenue from games of fortune in Macau in the third quarter reached 31.64 billion patacas (US$3.96 billion)—a 22% rise on a year ago.

On October 9th, Wynn Macau’s Hong Kong initial public offering had launched to much fanfare and champagne and a 6.9% first day gain on its stock launch price. The general losses on October 15th in the segment more or less evened themselves out the next day after the market decided the gloom had been too hasty a reaction.

That was certainly the view of some analysts quoted in the Hong Kong media. They said the initial stock falls were an overreaction and did not reflect the growth fundamentals of the casino operators.

This rather reminds Inside Asian Gaming of those Western intellectuals who used to claim that communism as practised in the former Soviet Union wasn’t actually what Marx intended.

What matters is how things really are, not how we’d like them to be. As Jesse Livermore, the great short seller of Wall Street stocks in the 1920s, once said: “Markets are never wrong, but opinions often are.”

The fact that there is political risk emanating from China in the Macau casino sector needs to stay at the forefront of investors’ minds, rather than being tucked away at the back in a dusty file marked ‘To be sorted’.

There is currently an internal debate about China’s economic management within the Communist Party of China. It’s a debate that has been actively encouraged by the current leadership as a form of ‘intraparty democracy’. This is about whether to give market forces greater influence in economic policy (particularly in the richer coastal areas such as Guangdong and greater Shanghai), or whether to continue with the status quo. The latter means in effect managing development with a view to redistributing wealth to the poorer inland provinces. Until that debate is decided one way or the other, expect China to continue exercising its right to apply the brakes to the Macau economy.

In that context, perhaps China’s desire to control the levers of Macau’s gaming industry looks less like political risk for investors and more like a safeguarding of their money. It certainly wouldn’t help them if there were civil strife in the core market.

One school of thought—expressed by senior gaming analyst Bill Lerner, a founder of Union Gaming Research based in Las Vegas, in an interview published in last month’s issue of Inside Asian Gaming—is that Beijing will try and rein in the Macau market’s annual growth to track more or less China’s annual GDP growth.

Against the background of all this political static in Macau, the prognosis for Asia-facing public gaming companies and their stocks is probably rosiest for those that have diversified into other legally sanctioned markets in Asia. The two obvious ones are Las Vegas Sands Corp in Macau and (soon) Singapore, and Genting Group in Malaysia, Hong Kong (via the cruise ship segment) and (early in 2010) Singapore.

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