Luck Runs Out for Macau's Casinos

After years of light-speed growth, gambling in Macau is finally taking a breather. This is the first year ever that gambling revenue in the Chinese territory has fallen, and the slowdown has been significant. October, the fifth straight month of dwindling business, was the worst decline in history. And the stock prices of Macau’s big six casinos now are down a good 30 to 40% year to date.

The change is significant because Macau gaming until now has seemed  an unstoppable juggernaut. Macau makes seven times the gaming revenue that Las Vegas does. Its casino stocks have soared. U.S. casinos like Wynn Resorts, which entered Macau in the early 2000s, make so much money in Macau that they’ve essentially become Chinese companies. And thanks to gaming, Macau has become rich. With just 28 square kilometers of land and 600,000 residents, Macau recently vaulted over Switzerland to become the fourth wealthiest territory in the world. Average per capita income of $80,500 puts it behind Luxembourg, Norway, and Qatar, but way ahead of the U.S.

The thing to understand is that gambling in Macau is done differently. Two-thirds of casino revenue comes from wealthy high rollers who routinely buy a million Hong Kong dollars worth of chips at one time. That’s about US $130,000. The size of the stakes played and the sheer number of willing Chinese gamblers are what put Macau on a totally different scale.

The problem is that the high rollers have stopped showing up. Now that Chinese leader Xi Jinping has made his very public anti-corruption campaign a priority, few want to be caught gambling at high stakes tables or flaunting wealth in any way. Xi has made it clear that he will go after anyone, all the way up to the powerful Zhou Yongkang, a former Politburo Standing Committee member. While it’s not clear if Xi is more interested in stamping out corruption or consolidating his political power, Macau is feeling the effects. No one wants to be caught in the crosshairs of the government’s efforts to quell public anger about income inequality and corruption.

Also affected by the slowdown are the junket operators who traditionally have brought in two-thirds of Macau’s business and taken a share of casino profits. Junket operators scour the country for rich gamblers, make travel and lodging arrangements, and extend credit since China limits the amount of money that people can take out of the mainland. The operators then collect debts once gamblers return to the mainland – a sometimes unsavory business, as China doesn’t recognize gambling debt as legally enforceable. In some ways, the junkets are a kind of shadow banking system. But they too are shrinking. Fewer are willing to extend credit to tycoons when they don’t know who will be targeted next in the anti-corruption drive. And real estate, which often is used as collateral for debts, is losing value. As a result, by some accounts, 30 or so of the 200 licensed junket operators have been driven out of business.

 Casino stocks are looking more and more out of favor, but it’s still a tough call. Even with this year’s pullback, they aren’t yet in true bargain territory -- and the Chinese government’s hand always is a wild card. On the other hand, there is a vast and promising mass market of Chinese gamblers willing to bet a more modest $50 to $250 per hand. As the middle class grows, casinos are likely to start catering to it, and that may be what leads the turnaround