Macau casino stocks have further to fall

May 14, 2014

By Ethan Bilby 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Macau casino stocks are still too high. A crackdown on Chinese payment card UnionPay is the latest threat to the gambling bonanza in the former Portuguese colony. Though casino stocks have fallen by almost a fifth in a few months, there’s not much room for disappointment.

Macau has traditionally relied on high rollers who arrive on trips organised by so-called junket operators – middle men who extend credit and collect debts in exchange for a commission from casinos. But recent growth has increasingly come from gamblers who arrive under their own steam. These “mass market” players are expected to generate 37 percent of total gross gaming revenue in 2015, up from 23 percent in 2011, Credit Suisse estimates. Though they bet less, mass market gamblers are more profitable because casinos do not need to split their earnings with junket operators.

The problem is that these visitors are also responsible for getting their own cash into Macau. UnionPay cards, which impose relatively few limits on overseas purchases, are an attractive option. UnionPay processed transactions worth $45 billion in Macau’s jewelry and watch stores last year, according to Reuters. Nomura estimates total retail sales in the enclave amounted to just $8.3 billion. Assume the remainder was wagered at the tables, and the casinos kept a quarter of it. That would amount to a fifth of the industry’s total gaming revenue in 2013.

Authorities are now targeting mobile UnionPay payment terminals which are registered in China but allow customers to withdraw cash in Macau. The crackdown may leave punters with fewer chips to play with. However, determined gamblers can still use their cards to buy goods and exchange them for cash at one of Macau’s many pawn shops.

Shares in Macau’s six operators are down by an average of 19 percent since early March. They now trade on an average of 17 times expected earnings for the next twelve months. That’s still above the industry’s rating as recently as early 2013.

Macau’s success depends in part on Beijing looking the other way as capital leaks out of the mainland. While a comprehensive crackdown is unlikely, policing mobile payment terminals is a sign that tolerance has its limits. Casino investors are still depending too much on lucky breaks.

(This article was refiled on May 16 to update calculations in paragraph 3 based on revised Nomura forecasts released after original publication on May 14)

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