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Macau’s Wheel of Fortune Turns

Las Vegas casino mogul Sheldon Adelson was in a buoyant mood on a visit to his new project in Macau three months ago. The 5,800-room Sands Cotai Central, scheduled for completion next year, had already cost $4.4billion by then – “but who’s counting?” he said.

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Mr. Adelson, one of the biggest donors to Mitt Romney’s US presidential campaign, is brimming with confidence about the future of gaming in Macau, as is his cross-town rival Steve Wynn, who has just broken ground on a new $4billion casino in the former Portuguese colony.

Yet both are raising their stakes in Macau just as the market is losing steam.

Total gaming revenue rose 12 per cent in June from a year ago, following paltry 7 per cent growth in May. That is a far cry from the blistering pace of expansion that fuelled a seven-fold increase in gross gaming revenue between 2004, the year the first foreign-owned casino opened in the city, and 2011, when casinos made $34billion in revenue.

Macau gaming stocks have slumped as that slowdown has become evident, with Sands China down around 30 per cent since April – falling 11 per cent in the past month alone – and MGM China down 02 since May. Wynn Macau and Melco International are both trading at record low price-to-earnings ratios.

The main reasons for the hesitation are the sheer size of the market – last year’s revenue was equivalent to seven Las Vegas Strips – and decelerating economic growth in mainland China.

But there are other issues causing disquiet, including the potential for new restrictions on mainland Chinese gamblers travelling to Macau, which has its own borders, and burgeoning competition in the region.

The 2008-09 global financial crisis showed what can happen to the gaming industry when the economy sours. Mr. Adelson’s Las Vegas Sands flirted with bankruptcy, lacking sufficient cashflow to meet debt obligations, and along with other cash-strapped rivals, halted construction projects in Macau.

However, a repeat of that scenario is unlikely, says Grant Chum, gaming analyst at UBS, because in 2008 many of Macau’s largest casinos had only just opened their doors.

In the years since the financial crisis, new resorts including the Venetian Macau, Stanley Ho’s Grand Lisboa and the Galaxy Macau have begun generating a lot of cash for their owners as the mainland Chinese economy averaged annual growth of more than 9 per cent and the number of mainland visitors rose nearly 50 per cent over the past three years. As a result, most Macau operators now have more cash than debt, says Mr. Chum.

Compared with Las Vegas casinos, which rely heavily on less-profitable non-gaming businesses, Macau resorts make up to four times more in earnings before interest, depreciation and amortisation than Las Vegas properties, according to CLSA, the Asian brokerage.

CLSA projects that even including the substantial costs of building new casinos and the backdrop of a slowing Chinese economy, the six Macau casino license holders listed in Hong Kong and the US will generate a record $3.8billion-$5.7billion in annual free cashflow in 2013 and 2014.

But the prediction assumes the continuation of favorable policies from Beijing – which is not a certainty. Last month, a vice-president of Agricultural Bank of China was arrested for allegedly using illegal proceeds to gamble in Macau.

“High profile cases like [that] could potentially have a profound impact on the gaming industry in Macau,” says Aaron Fischer, head of consumer and gaming research at CLSA.

It may have been coincidental but shortly after the arrest, a local newspaper in Macau reported that Beijing was tightening visa restrictions on independent travel from the mainland. The Macau government said it was not aware of any change but the number of independent visitors to the gaming enclave fell in the first quarter, the first decline since 2009.

Given the lack of transparency in China’s visa policies, it is not clear if the two were related. But Macau, where over half of the visitors are from the mainland, came to a virtual standstill in the summer of 2008 when China abruptly suspended issuance of double-entry permits without giving a reason.

Macau is also no longer unique as casinos spring up in other parts of Asia. The two casino resorts in Singapore made as much in revenue last year as the Las Vegas Strip, just two years after opening. In the Philippines, a massive casino district is being built along Manila Bay, and the residents of a Taiwan island last weekend [July 7] voted in favor of the government’s plan to allow casinos to be built there.

All this means that new construction in Macau comes with increased risk, says Mr. Pinge. “For the first time since 2009, new supply of gaming tables in Macau has exceeded the growth in demand. Investors should be aware of the intensity of the competition going forward, and how that may impact profit growth.”

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