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The Big Questions

Is regional gaming in the U.S. back and is Macau broken beyond repair?

The Big Questions

As we reach 2015, there are a lot of issues facing a rapidly changing gaming industry.

There is technology convergence, accelerating globalization, and new business models driven by consolidation, such as the creation of global lottery-slot-online gaming conglomerates.

Elsewhere, some casino companies are splitting into separate companies—asset-light casino managers on one side and real estate investment trusts as their landlords on the other.

Yet, two of the biggest questions to be answered this year are from the conventional brick-and-mortar world:

Will the U.S. regional gaming industry revive?

Will Macau remain the world’s fastest-growing casino destination?

The question about regional markets depends heavily on the health of the American economy and the optimism of the American consumer. Predicting the economy is a tricky business, but signs finally point to a resurgence.

In Macau, the answer depends on government policy, which appears to be increasingly cool, if not downright hostile.

Let’s take a look at both.

Regional Gaming

The statistical evidence of economic recovery is encouraging.

Employment is up and jobless rates are down. Consumer confidence and spending are back. And the improvement is accelerating. Further, it appears that casinos, which had lagged behind big-ticket consumer spending earlier in the recovery, are starting to join in.

October gaming revenues rose throughout the country, for example. Regional revenues grew a healthy 2.9 percent. Overall revenues, which include Nevada, rose 0.72 percent to $3.147 billion.

It was the fourth time in six months that national gaming revenues have grown.

Other evidence of recovery came from Isle of Capri, whose October-ending quarter beat expectations by a healthy amount. Improvement came even among lower-rated players who all regional operators have blamed for weak performances. Further, the improvement has continued into the current quarter, CEO Virginia McDowell said.

ISLE also gave some credence to the case regional casino executives have been making for several years—that with costs cut, more revenue will fall to the bottom line. True to that theory, ISLE turned a 3 percent rise in revenue into a 17 percent jump in adjusted EBITDA.

So, if the economy is improving, regional casinos, now running on lean expenses and with low stock valuations, might be a place for investors to be in 2015.

Macau

After years of double-digit growth, Macau gaming revenues have been declining at an accelerating rate for seven months and are now in the double-digit category.

The result has been a plunge of 30 percent to 50 percent in Macau casino stocks from their 52-week highs.

For the first several months, lots of explanations were given, ranging from contraction in credit that finances junket operators to the Chinese government’s crackdown on corruption, to the new smoking ban on the mass-market floor.

But there had been credit contractions and corruption crackdowns before and they didn’t have so damaging and so sustained an impact.

This time, however, the negative reasons have piled enough to scare the devil out of investors. There are even folks like Chartered Bank suggesting the VIP junket business model is broken.

Thus, the precipitous decline in stock prices.

We have often warned in this space about complacence over Chinese government policies relating to gambling. Those with rosy views had dismissed that concern, pointing to infrastructure improvements, and asking why the government would be building high-speed rail lines and bridges except to pour people into Macau.

Further, the Communist government is very pragmatic, they said.

Those arguments always seemed weak. China builds infrastructure throughout the country, not just to Macau.

And there also is political pragmatism, as in centralizing power. Tiny Macau, with its half-million people and its major industry mostly owned by outsiders from the U.S. and Hong Kong, is more apt to be made an example than to wield influence over the national government.

If anyone wants cause for pause in that regard, look at the slowly tightening noose the central government has put around Hong Kong, which is far more important to the country than Macau.

Or read these words from Basic Law Committee Chairman Le Fei in warning that Macau must wean itself from reliance on the gambling industry:

“One must not focus on economic growth and tax revenue alone when looking at Macau’s overall well-being, given the close connection between its economy, especially the gaming sector, and the mainland. One must think from the perspective of China’s economic and social security, stability and development.”

That sounds like Macau should do what the central government sees as the national interest, and not act just in its own interests.

Le’s comments came just as China implemented strict adherence to visa rules and reportedly stopped 1,000 mainlanders from entering Macau on the first day.

This doesn’t sound like a national government that will encourage the Macau government to give all the new Cotai mega-resorts coming online all the table games they want.

And those new resorts each represent multibillion-dollar bets on growth.

So the big question for Macau—and investors in its casino industry—is, what will government policy be in 2015?

The case can still be made for growth to resume at rates that justify the big investments.

But it’s not a slam-dunk.

And the answer could rest principally with one man: Chinese President Xi Jinping.

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