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Sin City East: Wagering On Macau's Prospects

If the global gambling market were a poker game, Macau would be stacking chips to the ceiling and Las Vegas would just be trying to hang on to its dwindling pile.

That scenario isn't likely to change anytime soon, or ever. Macau, a Chinese special district located 37 miles from Hong Kong, is far and away the world's biggest gambling destination. It can thank China's expanding population of middle-class and rich consumers.

Macau has more than five times as much gambling revenue as either Las Vegas or Singapore, which are battling for the No. 2 spot.

Macau passed Vegas for the top spot five years ago and has been running away from the pack ever since. It will likely pad its lead in coming months even though some folks are worried about a slowing Chinese economy.

"Macau will continue to grow and increase its market share, mainly because you still have growth coming out of China at the same time much of the rest of the world is either in recession or just emerging from recession," said Warwick Bartlett, chief executive of Global Betting & Gaming Associates (GBGA), a U.K.-based researcher and consultant.

Rapid growth in Macau has been a godsend for U.S. casino operators like Las Vegas Sands (LVS - News) and Wynn Resorts (WYNN - News). Thanks to Macau, both of these Las Vegas-based companies have managed to rack up strong profit gains the past couple of years despite a big dip in hometown business.

The question is how much longer Macau can prop up the world's gambling market. Some experts fear that China is headed for the kind of real estate meltdown that paralyzed the U.S. economy.

If that happens — and if the Chinese economy takes a big punch to the gut because of it — Macau's gambling market will feel the pain, says analyst Mike Turner, who follows casino stocks for Compass Point Research & Trading.

"There has been a huge buildup of wealth due to the residential real estate market in China," he said. "The increase in property values had been off the charts for many years. But lately that's been turning down. In my view, the residential property market will head south, and gaming will follow.

Turner expects Macau to report a decline in gaming revenue during the fourth quarter and on into next year, though he admits he's in the minority on that call.

"I have a more bearish outlook on gaming in Asia than most analysts," Turner said. "Longer term, I think this is a fantastic market. But I feel Macau is at a level that is unsustainable, and that it will get a little correction near-term.

Meanwhile, most analysts expect the Las Vegas gambling market to continue its slow recovery from the beating the recession gave it.

"Despite heightened regional competition and residual concerns surrounding the pace of recovery in the U.S., gaming trends and hotel occupancy rates in Vegas continue to show improvement," Citigroup analyst Anil Daswani noted in a report.

He estimates that Las Vegas' gambling revenue will rise 2% this year. The GBGA's Bartlett puts the growth figure at 5.5%.

1. Business It's also been a good year so far for casino-related stocks. On May 2, shares of IBD's Leisure-Gaming/Equipment industry group hit their highest point in nearly four years, and have since pulled back 15%.

The group features 31 stocks, primarily casino operators and makers of gear used in casinos. In addition to Las Vegas Sands and Wynn, the group includes MGM Resorts (MGM - News), racetrack operator Penn National Gaming (PENN - News) and Caesars Entertainment (CZR - News).

Those facilities use slot machines, table games, card shufflers, lottery equipment, gaming systems and other gear made by Bally Technologies (BYI - News), Shuffle Master (SHFL - News) and others.

Las Vegas Sands, with market capitalization of $36 billion, is the group's largest player. PokerTek (PTEK - News) is the smallest.

2. Market/Climate Global gaming revenue rose 5.6% to $419 billion last year, according to data from Global Betting & Gaming Consultants. That figure includes all gambling revenue, including lotteries and online gambling.

Macau generated $33.5 billion in casino revenue in 2011, up 42% from a year earlier. Las Vegas' casino revenue climbed 5% to $6.1 billion. Singapore's rose 57% to $4.4 billion.

Although Singapore has only been in the gambling business for a couple of years, many industry watchers expect it to pass Las Vegas this year.

"Singapore is neck-and-neck with the U.S. at the moment," Bart-lett said.

Much of the recent attention in Macau has centered on the April opening of the first phase of the Sands Cotai Central, a new casino resort from Las Vegas Sands that has been dubbed the world's largest tourism project. The second phase is due to open later this year, and the third phase in 2013.

Despite the hype surrounding Cotai Central's opening, Macau's overall gaming sales in April were about flat compared to the previous month, Turner says. That compares to a 2% sequential gain in April 2011 and a 4.5% increase in April 2010.

"Given the opening of part of the Cotai — and the fact that April included part of China's May Day holiday — you should have seen a little bit of an increase in sales for the month," Turner said.

Back in the U.S., new gambling venues continue to open in secondary markets across the country.

This trend could have a negative impact on Las Vegas' business, Citigroup's Daswani says.

He points to regional competition from new casino openings in Atlantic City, N.J., Maryland, Kansas and Ohio in 2012 as potential threats to the Las Vegas Strip.

Atlantic City, the nation's No. 2 gambling market, faces competitive challenges of its own.

"The potential legalization of full-table gaming in New York and Florida could be a strong threat to Atlantic City in the long run," Daswani noted.

3. Outlook The global economy will have a lot to say about how things proceed in the world's top gambling markets.

"The only thing that would cause Macau to slow would be if the Chinese economy suffers a hard landing," Bartlett said. "It might not necessarily stop the flow of gamblers to Macau, but they might spend less.

For now, most of the projections for Macau are upbeat. In his report, analyst Daswani forecast a 20% increase in Macau's gross gaming revenue this year. He expects Singapore to see an 8% rise in gross gaming revenue in 2012.

Expectations are more modest for Las Vegas.

"You'll probably see mid-single digit growth in revenues this year and next year," analyst Turner said. "I don't expect a major ramp in spending. The modest growth projections are indicative of an economy that's still growing slowly."