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Mixed Messages

Macau market data for May signals transition

Mixed Messages

The regulatory authorities in Macau, China reported gross gaming revenue (GGR) for the month of May 2012 of US.3 billion (MOP 26.1 billion). Even though this represented the highest revenue level so far for 2012 and the second-highest monthly since the record was set last October at US.4 billion (MOP26.9 billion), the stock market reacted negatively with stock prices showing reductions across the board.

Macau stocks were down 23 percent on average, more than the Hong Kong Hang Seng Index’s decline of 12 percent in May.

The reason for the negative feeling was that, although the growth of the Macau market was continuing, it appeared to be slowing. A growth rate of 

7 percent year-on-year was the lowest rate since July 2009. By comparison, in April, casino gross gaming revenue in Macau went up 21.9 percent year-on-year.

In a note published to its clients on June 4, Morgan Stanley attributed the reasons for the apparent slowdown to a number of factors. First, the month of May 2012 contained only eight weekend days compared to the nine in May 2011. In addition, May 1 (the festive May Day holiday) fell on a Tuesday; that meant that part of the revenue figures were calculated into the month of April.

Second, luck played a role in the numbers. May 2011 had a significantly higher luck factor of 3.32 percent compared to the norm of 3.14 percent.

Third, as is well-known in Macau, many high rollers prefer to stay away from casinos during public holidays to avoid the crowds of people. This leads to lower high-end VIP volumes.

Finally, the note attributes the difference in year-on-year figures to the high base effect created by the opening of the Galaxy Macau property on Cotai on May 15, 2011.

In summary, Morgan Stanley believes that June 2012 year-on-year monthly revenue growth will be on the order of 17 percent.

The note concludes that despite lower May revenue, it retains its growth assumption for the full year of 2012 to be around 18-20 percent.

Meanwhile, toward the end of May, Macau Economy and Finance Secretary Francis Tam was clearly not in agreement with analysts. Speaking at a public meeting, he stated that 2012 revenue is budgeted to fall well below the year-to-date average of US$3.1 billion (24.8 billion patacas) per month and that remains unchanged in the government’s forecast.

“Because of fluctuations in the global economic environment that have affected the economic circumstances and capital flows in Macau and neighboring areas,” said Tam, “the Macau government’s estimate for gaming revenue this year has undergone an appropriate adjustment in the 2012 budget.

“We predict that this year average monthly gaming revenue in Macau will be about 20 billion patacas (US$2.5 billion), and this is a more cautious estimate compared with last year’s actual figure of 22 billion patacas.”

Tam characterized his estimate as “steady” performance of the market. However, the estimate was at variance with a statement last month from the deputy head of Macau’s gaming regulatory agency.

Anthony Leong, deputy director of Macau’s Gaming Inspection and Coordination Bureau (DICJ), told local Macau media that he expects gross revenue to grow at a “double-digit level.” He chose not to elaborate with a more precise figure.

Grant Govertsen of Union Gaming Research Macau wrote in the last week of May about Tam’s remarks. “We do not believe this forecast is based on actual trends or any special insight the government might have into the VIP market,” he wrote. “Rather, we think the government, as always, is being ultra-conservative with respect to its budgeting process.”

As an example of this conservatism, he cited the government’s gross underestimation of the final figures for 2010 and 2011.

Union Gaming is approximately in line with the rest of the market observers with a forecast of 20 percent year-on-year growth. The company also believes that lower monthly base comparisons for the rest of 2012 will spur on the predicted growth.

All this has to be seen against the macro-economic background: China’s real estate market, after a period of steeply climbing prices contributing to an accumulation of real estate wealth in the mainland of China, could be now be approaching a slowdown, reducing the amount of disposable income with a subsequent effect on gaming revenues and available credit for junket players.

This could be further exacerbated if the European credit crunch spreads around the globe. Junkets may reduce the amount of credit extended for gambling and the amount of available money could decrease. This would affect rolling chip volumes and VIP revenues, which have already shown a significant slowdown in the past six months.

In the meantime, individual gaming operators in Macau seem to be smiling at the figures that they have seen for May.

Mixed messages indeed.



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