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Trees And Gaps

There is no such thing as endless growth

Trees And Gaps

Wall Street is as full of old-fashioned aphorisms as baseball.

We were reminded of two of them recently when Macau gaming revenues in May came in below initial expectations, and as investors sold off Shuffle Master following its second-quarter earnings results.

The first expression: Trees do not grow to the sky.

We have become accustomed to 20, 30 and 40 percent year-over-year gaming revenue growth in Macau.

Casino operators say they see no end of growth in VIP players, and the new and planned amenity-rich mega-resorts built by the likes of Melco Crown, Galaxy and Las Vegas Sands should tap the seemingly boundless growth of the Chinese middle class.

And just to make sure those hundreds of millions of potential customers can make their way to Macau, vast infrastructure projects are under way like a bridge to the mainland and Hong Kong, and stupendous tourism draws on adjacent Hengqin Island.

Hengqin is especially interesting. Connected by bridge to Macau, the area has been targeted by the mainland government to be a family destination drawing tens of billions of dollars in investment.

Projections are that the population will grow from 8,000 to 280,000 in the next eight years, and giant developers from the U.S., Hong Kong and mainland China are scouring it for opportunities.

All of this suggests unlimited growth for Macau casinos, at least as unlimited as mortal investors need it to be.

Then came the lovely month of May.

Gaming revenues grew just 7.3 percent. And VIP revenues grew hardly at all.

Suddenly, analysts took down their expectations as they searched for reasons for the deceleration, whether from economic slowdown on the mainland or mega-resort fatigue, or that the market, while huge and growing, is not unlimited.

And some casino operators, while continuing to stress the long-term health of the market, scratched their heads over the slowdown in VIP growth.

Macquarie analyst Gary Pinge even suggested that table game capacity might have gotten ahead of demand.

That would be stunning in a market where the most commonly mentioned obstacle to growth is the government’s cap on the number of table games.

Still, everyone likes the long-term prospects given all that is mentioned above.

But before we go blithely off into complacency, we might want to consider competition. It is a capitalistic truth that if someone has a great idea, others will copy it and competition will take its toll.

So, let’s play some “what ifs.” What if Philippine officials are right and the mega-resort cluster rising along Manila Bay will do at least $11 billion a year in revenue? What if Korea follows with similar results? Then Japan, Taiwan, Vietnam, elsewhere?

We’ve already seen the revenues Singapore does with just two mega-resorts.

If imitation does flatten Macau’s long-term growth rate, it doesn’t necessarily affect casino operators. They will be pursuing those opportunities as well.

But it does serve to remember that trees do not grow to the sky.

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