The Global Guru

The Global Guru: Macau: Asia’s Biggest One Way Bet

When I first visited Macau almost 20 years ago, this former Portuguese colony was a sleepy backwater overshadowed by glitzy and cosmopolitan Hong Kong.

But since reverting from Portugal to China during 1999, Macau has transformed itself beyond recognition, thanks to tourism, construction and, above all, gambling.

Within the short decade after the Chinese government opened Macau’s gambling industry to competition, Macau overtook Las Vegas as the planet’s premier gambling destination and raked in $38 billion in annual gambling revenues in 2012.

And “overtook” is putting it politely.

With the Las Vegas Strip’s more than 40 casinos generating 6.2 billion in 2012, the revenues of Macau’s casinos are now six times that of Las Vegas.

Why Macau Trounced Las Vegas

With the benefit of 20/20 hindsight, Macau’s spectacular growth shouldn’t come as a surprise. With a population of half a million, Macau is the only city in the Chinese-speaking world that permits casino gaming. And for the Chinese, gambling is a serious affair. As one Chinese hedge fund manager told me, gambling to the Chinese is what alcohol is to Westerners. The Chinese don’t drink. Instead, they gamble — a lot.

The numbers bear this out. More than half the $100,000-plus high rollers in Las Vegas are Chinese. That’s why you see casino-sponsored charter flights loaded with Chinese arriving in Las Vegas on a daily basis.

But Las Vegas is a long way from China. Contrast that with Macau, where there are 2.3 million people with at least $10 million in the bank who are within “weekend trip” distance of that gambling center. More than 100 million people reside within a three-hour drive of Macau and more than 1 billion people (that’s more than three times the population of the entire United States) live within a three-hour flight.

What’s remarkable is that Macau’s expansion came in the face of the global credit crunch and the “Great Recession.” Last year, Casino revenue in Macau climbed 13.5% to a record $38 billion, as it confirmed its position as the world’s biggest gambling market. And that growth is continuing into to 2013. Gambling revenue in Macau rose 11.5% in February compared to the same period last year. And for the first 10 days of March, revenues shot up 38.5% over the prior year.

Whereas Las Vegas was once the model, the comparison with Las Vegas today is almost unfair.

While Macau is growing by leaps and bounds, revenues on the Las Vegas Strip plunged 18.8% in January compared with last year.

Las Vegas Operators Descend On Macau

Stanley Ho, Macau’s most famous casino mogul, enjoyed a monopoly in Macau’s gaming industry for 40 years. But since the government opened up the market in 2002, American giants Las Vegas Sands (LVS), Wynn Resorts (WYNN) and MGM (MGM) have bet the house on Macau.

The results have been nothing short of spectacular. Las Vegas Sands opened the Sands Macau, the first Las Vegas-style casino, in May 2004. That casino, which cost $265 million to build in 2004, generated $843 million in just the final three months of 2012. No wonder over 90% of the Las Vegas Sands’ profit comes from Asia, including half from its Macau properties. And that’s with Las Vegas property, The Venetian, which is one of the top-three gambling venues on the Las Vegas Strip.

No wonder Las Vegas Sands and its competitors are upping their bets. In October, MGM received approval to build a $2.5-billion casino resort, its second in Macau. Local operator SJM Holdings received approval to build a 2,000-room hotel with 700 gambling tables. Wynn revealed plans for a new $4-billion resort. Sands itself is planning a Parisian-themed resort that would be its fourth casino project in Macau.

Macau: Is It Worth the Gamble?

As inevitable as the rise of Macau seems today, you can always count on short-sighted analysts to continue to get it wrong.

Skeptics point out that that volumes from “whales” — big gamblers who drop one million yuan ($160,700) at a time — have tumbled by two-thirds, as Chinese authorities step up scrutiny of money transfers as part of a broader move to combat corruption.

But that misses the point. U.S. casino operators know that this decline will be offset by a relentless onslaught of middle-class Chinese. Their vision is that they can do for Macau what they did for Las Vegas: transform it into a multi-day destination for people who want to shop, see shows, eat in fancy restaurants and attend conventions — as well as gamble. Indeed, revenue generated from mass-market visitors is rapidly growing. Chinese visits grew by 22.5% year on year during the ten-day period around the Chinese New Year.

The trend seems inexorable.

My advice? Don’t bet against Asia’s Las Vegas.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

P.S. You can listen to a recording of an interview I did with Ron Nowracki on Wealth DNA radio yesterday. In it, I cover some of my top investment ideas for 2013, as well as how you can invest in hedge fund style investments at the click of a mouse.

Sincerely,

Nicholas Vardy, CFA
Editor, The Global Guru

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