China’s Worsening Economy Is Bad News for Macao Gaming Market
Chinese economy woes
The Chinese economy has been in a slump and has thus launched a string of actions aimed at controlling capital outflows from the country. In April this year, the government had launched a campaign to crack down on illegal fund transfers through offshore companies and underground banks, which resulted in numerous arrests of suspected people, especially in Macao where money laundering is a severe problem.
Even more disturbing is the fact that Macao’s revenue growth has closely tracked the Chinese GDP (gross domestic product) growth since 2006, and the correlation between these metrics is not expected to suddenly stop.
China’s economy is further threatened with the over-leveraged industries that are currently dealing with decreased demand and overcapacity. These include high growth sectors of the past like real estate, manufacturing, and construction. The fact that many Chinese VIPs (Macao’s major customers) are linked to these industries doesn’t help. Many of these VIPs have made their wealth from highly leveraged bets in China’s booming property market. Falling property prices spell more trouble for these wealthy individuals and gives them another reason to stay away from Macao’s gaming market.
The downfall means there’s more pain for Macao casino players like Wynn Resorts (WYNN), Melco Crown Entertainment (MPEL), Las Vegas Sands (LVS), and MGM Resorts (MGM). For broader exposure to the leisure space, investors can invest in the Consumer Discretionary Select Sector SPDR Fund (XLY).
Weaker currency woes
To add to the slowing economy, the Chinese stock market crash and the devaluation of the Chinese currency has had ripple effects on the Macao gambling market. The devaluation would make traveling more expensive for Mainland China visitors, which makes up for the biggest revenue in the industry and would also hurt the Chinese tourism to its neighboring city. The junket systems are also suffering due to bad debts by gamers and a fall in the number of VIP visitors.
New pact
A new pact was recently signed between the People’s Bank of China and the Monetary Authority of Macao, which aims to curb money laundering and terrorist financing activities in the country. The new anti-money laundering pact would crack down on the underground banking network, especially with respect to cross-border money flows. Gambling companies such as Galaxy and Wynn Macao (WYNN) will be the most affected, as the company earns ~70% of its revenue from its Macao operations as opposed to MGM Resorts (MGM) with 30%, and Las Vegas Sands (LVS) with 60%.