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[email protected] The Good Year Ahead Those who make a living analyzing the stocks of Macau’s six casino concessionaires have been warning for some time that the stratospheric growth of the market was due for a reunion with terra firma. If they’ve differed, it’s been on the degree of unpleasantness, but then that’s as much a matter of investor perception as anything. No doubt, when May’s numbers came out showing gaming revenue growth only slightly above 7% year over year, and way off April’s 22%, there were many investors who were sure they heard the crunch of metal. So what should we make of the fact that for the first time in almost three years a monthly increase in GGR failed to crack double digits? Probably not too much. Last May’s 43% is simply a brutal comp. Consider also that this year’s haul of 26.08 billion patacas was the second-largest for any month on record—only last October’s was larger. And there were some quirks in the calendar to contend with this year, like one less Sunday, and a May Day holiday that started on a Tuesday as opposed to a Sunday last year. It appears bad luck played a part as well. In all, the May numbers were right in line with the median estimate of 7% of analysts polled by Bloomberg News . Looking ahead to this month, it’s expected the picture will brighten considerably against June 2011’s kinder comparable of MOP20.8 billion. “Mid-teen growth levels may not be out of the question,”wrote CLSA Asia-Pacific Markets’ Jon Oh. Morgan Stanley is pegging it at 17%. Looking at the full year, the gloomiest forecasts have the market growing at around 11%. You’ll recall that isn’t all that far from where projections stood at the start of the year, before a stellar January and February induced a flurry of revisions skyward. To date, GGR is up about 21% year over year. It was up 43% in the first five months of 2011. Still, we’re talking about roughly a US$2.75 billion increase. Goldman Sachs expects 22% GGR growth for 2012. Credit Suisse’s Gabriel Chan is holding to 24%. Relatively speaking then, the numbers would seem to justify a bit of perspective. Obviously that implies coming to terms with the reality that GGR can’t be expected to fly off the charts forever. The fact that many investors find that disappointing is understandable at a certain level. Analyst StevenWieczynski, who covers the industry for Stifel Nicolaus Capital Markets, may have put it best, though, when he told the Las Vegas Review-Journal :“As with most things in life, investment-related or otherwise, things tend to run in cycles. As it pertains to Macau, we believe it is inconceivable to think 40% to 50% growth could continue in perpetuity.” Analyst Mike Turner of Compass Point Research & Trading actually describes his outlook as “bearish” because he believes the market is headed for “a little correction near-term” as China’s red-hot economy shows signs of cooling. “Longer term, I think this is a fantastic market. But I feel Macau is at a level that is unsustainable,” he told Investor’s Business Daily just a week or so before the release of the May numbers. VIP baccarat is at the center of most of these concerns because it accounts for 70%of themarket and because growth in the sector has been slowing for months, which most observers attribute to increasing weakness in China’s economy. If you hold with this, then you probably believe growth in the sector will continue to slide depending on how wide and how deep the cracks are, or how amenable they will be, or not, to the kinds of stimuli the central government was able to apply to insulate the nation from the worst of the 2008-2009 global financial crisis. Indications are that a massive bubble in real estate prices is collapsing as we speak, and that’s been the font of much of the liquidity of the country’s newly rich, not to mention the repository of a lot of the savings of the country as a whole. Economists expect GDP growth this year to decline 150 to 200 bps from last year’s 9.2%. The last five years have seen Macau’s gaming revenue growth tracking China’s quarterly GDP growth fairly closely, so this will be something that bears watching. On the plus side, mass-market GGR continues to do gangbusters—a fact Grant Govertsen and Felicity Chang of Union Gaming Research Macau say was obscured by May’s poor hold. “This also likely masked the positive impact of new supply, especially on the mass segment,” they wrote. “While VIP in May was clearly slow relative to recent history (poor hold or not), growth of mass business remains very strong—this is important as every dollar of mass/slots GGR is significantly more profitable than VIP.” They’re far from alone in this view. It is ample reason to believe 2012 will yet turn out to be another pretty solid year.