Trade War

What will tariffs with China mean to gaming?

Trade War

A of the moment of this writing, President Donald Trump has announced he might triple tariffs on China by adding $100 billion in products subject to tariffs to the $50 billion he earlier announced.

China is responding more assertively than it did after Trump’s initial announcement, saying it will impose its own severe tariffs and will not negotiate trade issues under current circumstances.

Now, this might be posturing by both sides before they do, in fact, sit down to negotiate. However, it raises the threat that a trade war might, indeed, break out.

Thus, it is worth asking what impact a trade war could have on the gaming industry.

Here is speculation on some possibilities:

  • Fewer Chinese coming to the U.S., and to Las Vegas in particular.

A trade war accompanied by what amounts to a propaganda war has the potential to reduce the number of Chinese coming to the U.S.

The Chinese government could restrict travel through regulation, or many Chinese might feel uncomfortable coming to the U.S., especially the kind of high-profile wealthy Chinese who fill Las Vegas baccarat pits.

Baccarat comprises 20 percent or more of Las Vegas Strip gaming revenues. Obviously, only a fraction of bac players are mainland Chinese, but it’s an indication that a significant reduction in Chinese visitors could have an impact, especially on the handful of companies with high-end baccarat play—Wynn Resorts, MGM Resorts, Las Vegas Sands and, to a lesser extent, Caesars.

  • Recession or slowing economy.

There are increasing signs that we might be at the end of the business cycle with job growth slowing, but wage pressures rising, leading to fear of both inflation and the impact on the economy as the Federal Reserve Board raises interest rates to combat inflation.

A trade war that can chip another half-percentage point or so off the economy could help add to the possibility of recession, or to the strength of a recession that might occur, anyway.

Recession obviously means fewer discretionary dollars for American consumers to spend on gambling and entertainment, thus possibly causing a reduction in gaming and non-gaming revenues throughout the country.

Companies also cut expenses in recessions, including travel and conference budgets, another potential hit to Las Vegas.

  • Making examples of American companies.

Much as Trump and the Chinese are selecting industries to target with tariffs, the Chinese government can single out particular companies to send a message.

This is where American casino companies operating in Macau could become pawns in a U.S.-China trade war.

Cracking down on them would be immaterial to the Chinese economy, but they are high profile, so the message would be loud and clear.

Further, the timing could be right as gaming concessions expire in 2020 and 2022. Opening concessions to a bidding process would send the message.

So far, the Macau government has been making reassuring sounds about concession renewals, but Macau can be compliant if the national government decides to turn on the heat.

So, now that we’ve speculated on what could happen, what’s really likely to happen?

Trump has been president long enough now that we’ve seen bluster amplified to greater bluster amplified to even greater bluster yet.

But despite the bluster, Trump hasn’t shown himself to make draconian decisions.

If we had to bet, we would put our money on the side that Trump will raise as much noise as he can and then, at the limit, avoid a trade war, possibly in a high-level negotiation in which he can come out boasting of a win-win conclusion.


Interest Rates

A more significant threat to gaming stocks might by the Fed raising interest rates significantly.

Capital-intensive industries of all kinds have lived in a friendly world for a long time with interest rates well below historical norms.

That period might be coming to an end, meaning a potential triple-whammy of higher interest expenses on their debt dampening profits, a slower economy affecting consumers, as mentioned above, and debt becoming a bigger competitor for investor dollars.

In the long term, higher rates—or maybe more normal rates is the better way to say it—could be better for the economy and give the Fed some room to then lower rates if a recession comes along.

But for now, the impact of higher rates deserves investor consideration.

Q1 Coming Up

Of more immediate concern is the first quarter earnings season which is about to begin.

If just looking at gaming revenues, casino companies might report their first bumpy quarter in a while.

According to Fantini’s National Revenue Report, U.S. gaming revenues through February declined 0.36 percent overall and 0.86 percent on a same-store basis.

States are still releasing March revenues as of this writing, and they are somewhat encouraging with most showing gains, though severe weather will take a bite out of casinos in the Middle Atlantic, Northeast and Midwest.

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