The visa situation is the first negative catalyst to emerge in Macau and the stocks are sliding. The remaining near-term (positive) catalysts could spark a rebound but investors shouldn’t lose sight of some 2010 warning signs.
The implementation of a new visa scheme was confirmed by the South China Morning Post today with the public security office in Guangdong. It’s actually not a new scheme since they are reverting to the once every two month visit restriction in place pre-August. We shouldn’t be surprised. Beijing wants growth, but controlled growth - we think in the 5-10% range in terms of Mass revenues. The restrictions shouldn’t be seen as a big negative since it’s indicative of excess demand – the only gaming market with excess demand – and will result in long-term predictable and strong Mass visitation. Get used to it.
To us, the new restrictions are not all that important fundamentally but could continue to pressure the Macau stocks over the near term. But we definitely care as more attractive buying opportunities may emerge. Why aren’t we concerned about the reinstated restrictions?
- Solid, predictable growth generates very valuable cash flow streams as discussed above
- We’ve shown that there is little correlation between Mass visitation and gaming revenues, unlike every other market. Macau follows a 90%+/10%- rule where less than 10% of the customers generate over 90% of the business. This is clearly evident by the VIP contribution but also on the Mass side where the big hitters generate a huge amount of the Mass revenues.
- While Mass growth has been solid, VIP growth outstripped Mass in September and should continue to do so over the near term. See the table below. Other than the typical post holiday slowdown, the outlook for VIP growth looks terrific over the next few months owing to easy compares, excess liquidity, and Chinese stimulus. VIP is unlikely to be affected by the visa restrictions.
Rather than focus on the visa restrictions, the Macau bears should focus their attention on two bigger issues facing Macau:
- Mass table game supply – 25% growth in YoY Mass table supply over the first half of 2010. Beijing may be targeting 5-10% Mass growth but they are probably not targeting 5-10% Mass same store growth.
- VIP bubble? As shown in the chart, VIP is on a tear. This business is a roller coaster recently fueled by Chinese stimulus and free flowing credit from the junkets. We fear that we are in a bubble similar to 1H 2008 that will eventually pop, probably in 2010.
LVS looks to be most at risk from the new visa restrictions since they generate more of their business from Mass and are the slot revenue leaders. It is also interesting to contemplate whether the restrictions were a big “Screw You” to Sheldon since visas were relaxed ahead of Wynn’s IPO but strengthened ahead of the LVS’ IPO. LVS is also most susceptible to the Mass supply growth next year, particularly Oceanus which will be conveniently situated between Sands Macao and the Macau Ferry Terminal. Longer-term, Mass is where you want to be so LVS is well positioned. MPEL and WYNN seem better situated over the next few months, however, given their reliance on VIP and could experience a sharp rebound off the upcoming visa related lows.