No High Rollers, No Problem for Macau Casinos

Macau may not have as many high rollers these days, but they’re still making a comeback in terms of gambling revenue.

December marked the fifth straight month that Macau gross gambling revenue increased year over year. Up until August, the city’s revenue had declined for 26 straight months.

Prior to August, Macau was feeling the brunt from a gambling crackdown by Chinese President Xi Jinping, who wants to stop money laundering and political corruption in the country.

Although successful, the campaign has made high rollers hesitant to travel to Macau, which has been a hub for money laundering.

The result has been VIP gambling being halved in the three years that Jinping has been president. On the bright side, Macau has seen over a 50% uptick in low-stakes gambling in the last few years.

According to the Wall Street Journal, low-stakes (mass) gambling can offer better profit margins because casinos don’t need to pay middlemen known as junkets to recruit whales.

Because of this, several casinos still see the potential for growth in Macau and have completed multi-billion dollar investments.

However, with VIP gambling still stagnant, Chinese housing prices peaking, and credit becoming tighter, 2017 isn’t expected to offer a real turnaround.

In recent months, UnionPay – China’s version of Visa and Mastercard – announced a withdrawal limit in Macau that sent casino stocks tumbling. As we covered, the report wasn’t entirely accurate, but it did put a dent in the gambling economy.

Nevertheless, 2016 is seen as a win for Macau, especially since casino stocks rallied.

The valuations of Macau’s six casino operators are above their long-term average as far as enterprise value to forward earnings before interest, taxes, depreciation, and amortization (a.k.a. Ebitda) are concerned. Industry analysts predict that the operators’ combined Ebita will increase by 12% in 2017.

Considering the change in Macau’s gambling climate, operators that do a good job of attracting casual gamblers and vacationers should perform especially well this year.

Such is the case with Sheldon Adelson’s Sands China, which made a $2.7 billion investment in Parisian Macao. Galaxy Entertainment, with its hotels that feature artificial beaches, will likely be another.

One casino operator that could struggle is Stanley Ho’s SJM, which, formerly owning a monopoly on the city’s gambling, won’t open its newest casino until 2018.

Regardless, things are looking up for Macau’s six casino operators, even if VIP gambling doesn’t figure to improve any time soon.

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