It seems that the situation in the gambling industry is going from bad to worse. Share price of leading casino companies were hit during the trading hours on Monday as economic data released by the Statistics and Census Bureau (DSEC) demonstrated weakness in Macau – a key operating region for these casino companies. Companies that were impacted by the release include Wynn Resorts (NASDAQ:WYNN), MGM Resorts International (NYSE:MGM), Las Vegas Sands (NYSE:LVS) and Melco Crown Entertainment (NASDAQ:MPEL).
Per DSEC, Macau’s Gross Domestic Product (GDP) for the fourth quarter of 2014 plunged 17.2% year on year in real terms, owing to a significant decline in gross gaming revenues and shrinking visitor spending. This marked the second consecutive quarter of GDP decline and the highest decline since 2001 when the Statistics and Census Service began compiling data. Consequently, GDP for full-year 2014 contracted 0.4% in real terms.
Given the scenario, analysts declared that Macau is in recession -- two consecutive quarters of GDP decline.
What Led to the Decline in Macau?
Per analysts, as Macau started to grow, it focused on casinos, instead of diversifying into other areas. Since more than 80% of the government's revenues come from gaming, the economy is closely tied to the gambling industry.
As a result, when the Chinese government announced a crackdown on corruption in Macau in 2014, VIP gamblers either opted to refrain from gambling or tried their fortunes elsewhere. This lowered footfall at the local casinos, and thereby gambling revenues. Also, a cooling Chinese economy, political unrest and a smoking ban on mass market gaming floors compounded woes.
No Respite from the Persistent Decline
Despite the Chinese New Year holidays, gross gaming revenues for the month of Feb 2015 plunged 49%, thereby marking the ninth consecutive decline and the fifth consecutive double-digit decline. Thereafter, gross gaming revenues for the month of March also disappointed investors. We note that owing to the anti-corruption drive, Macau’s visitation arrivals fell 1.5% year over year for the month of January, which is a negative for the companies operating in the region.
Per media reports, Morgan stanley has downgraded the Macau casino sector as it expects gross gaming revenues in the region to decline 25% year over year in 2015 compared to the previous expectation of a decline of 7%. Last week, analysts from both Deutsche bank and Credit suisse reportedly made bearish comments and provided a weak forecast for the gambling industry.
Is There an End to Macau’s Woes?
We believe that the worst is not over yet, with China reportedly expected to launch another major crackdown to restrict illegal money transfers. The crackdown comes at a time when the casino operators are already feeling the heat of China’s anti-corruption campaign. This is expected to further reduce footfall and hit Macau casino revenues. (Read: Macau Anti-Corruption Drive to Intensify, Casino Stocks Dip)
On the other hand, the Macau government is expected to submit a bill to ban smoking in the VIP rooms after implementing the same for mass gaming floors in Oct 2014. This would compound woes as the smoking ban, if implemented, would further hurt revenues.
There are a few resort openings in the pipeline by operators such as Wynn Resorts, MGM Resorts and Las Vegas Sands in the near term. We need to wait and see whether these openings are sufficient to revive the fortunes of the region and drive demand as economic growth is largely driven by an increase in aggregate demand.