Are Macau Gaming’s Best Years Behind It?

The best days for the largest gaming market in the world, Macau, may be behind it, as weakness in the high-roller sector spreads to the mass market, according to Gary Pinge, analyst at Macquarie Securities, who cut his estimates for the industry earlier this week.

Sands Cotai Central, Sands' newest integrated resort, in Macau.
Aaron Tam | AFP | Getty Images
Sands Cotai Central, Sands' newest integrated resort, in Macau.

"I think the days of 40 percent growth are probably behind us," Pinge, who is based in Hong Kong told CNBC.

Pinge points out that the nearest province of Guangdong already accounts for 55 percent of mainland Chinese visitors to Macau, whereas Hong Kong visitors account for 40 percent of total visitors in the biggest casinos. The “low hanging fruit have been picked,” Pinge said.

In a report to clients, Pinge cut his 2012 revenue growth forecast for Macau's gaming industry to 13 percent from 15 percent. The figures are a far cry from the 58 percent growth seen by the industry in 2010 and 42 percent expansion in 2011.

Most of the slowdown in Macau - which overtook Las Vegas as the world's No.1 gaming destination by revenue back in 2006 - will come from the high-roller or VIP segment, which contributes about 70 percent of Macau's revenue. Those high spenders have been pulling back since the middle of last year because of slowing growth and a credit crunch in China.

The VIP segment will probably grow just 10 percent this year, far slower than the 44 percent growth last year and a 70 percent expansion in 2010, Pinge wrote in the report.

But Pinge also cut his estimate for the mass market segment, which many had expected to continue doing well. Growth in that segment has remained robust so far, with a 35 percent increase in 2011 from 34 percent in 2010.

According to Pinge, the mass market is beginning to show cracks. He downgraded growth forecasts for the segment to 20 percent in 2012 from 28 percent last year.

“While overall visitation growth has been strong, this has been buoyed by low-value package tour customers,” Pinge wrote, adding that the growth is being driven by higher-spending customers, who could pullback in tandem with the behavior seen in the VIP segment.

The declines across all segments of Macau’s gaming industry have yet to be reflected in the share prices of the main players, Pinge said. He cut his price targets for the Hong-Kong listed shares of Sands China and Melco Crown to HK$27.20 ($3.50) from HK$31.70 and HK$15.70 ($2) from HK$17, respectively.

"Everything has to be seen from the perspective of valuation. I think the weakness hasn't been priced in," Pinge said. "I think the market is looking for a more optimistic outcome than Macau can actually deliver."

But other analysts say a slowdown has already been priced into the shares of the Macau players.

Shares of both Sands China and Melco-Crown have plummeted more than 20 percent respectively since their 2012 peaks in April. The stocks have underperformed the benchmark Hang Seng Index , which has declined about 10 percent over roughly the same period.

"It's no secret that VIP growth has come down from previously lofty levels," said Grant Govertsen, Managing Partner and Lead Analyst of Union Gaming Research in Macau. "You're already seeing a slowdown priced into shares of the Macau names, but I don't necessarily see a repeat of the Vegas 2008 scenario when the public equities of many of these names was seemingly going to zero."

He and other analysts say that it's too early to worry about the mass market.

"While Macau's gaming industry is certainly not 'recession-resistant', we are still holding our view that Macau's casino gaming revenues will post double-digit growth in 2012 over 2011," Jonathan Galaviz, Managing Director and Chief Economist of Galaviz & Company in Las Vegas told CNBC. "Over the long-run, a decade, the trajectory of tourism in Greater China will be very significant and Macau will capitalize upon that growth.”

The only scenario where the VIP segment could collapse would be a hard landing in China's economy, that is, GDP growth of under 5 percent, Aaron Fischer, Head of Consumer & Gaming Research at CLSA Asia Pacific Markets in Hong Kong said.

"If there was a hard landing in China, we believe the VIP segment could fall 20 percent, which would cause the stocks to selloff but this is not our expectation," Fischer said. "Our checks show that business is still trending well, but growth is slowing down due to the high base [last year].”

—By CNBC’s Jean Chua.