China macro variables drive an incredibly high R Square with VIP volume in Macau.
It makes sense that as a discretionary consumer source, VIP revenue in Macau would be tied to Chinese macro variables. However, we didn’t expect this level of correlation. We regressed VIP Rolling Chip (volume) against a number of China macro variables. The most powerful and statistically significant variables were GDP and interest rates. This regression produced an R Square of 0.97 and both variables were statistically significant. In other words, y-o-y change in GDP and sequential interest rate moves explained 97% of the change in VIP volume. The correlations can be seen in the chart below.
The strong relationship between these variables is disconcerting considering the China view of our Hedgeye macro team. They have been calling a sequential slowdown in GDP and liquidity for China. It is becoming increasingly apparent that they may be right. So far we haven’t seen a slowdown in Macau’s VIP segment. Through January 20th, Macau gaming revenues were reportedly up 67% for the month. That rate of growth will slow in the last two weeks of the month since Chinese New Year fell in January (26th to 28th) of 2009 but will occur in mid-Feb this year.
To be clear, the Mass business is also tied to the China macro variables as can be seen in the chart below. However, the betas driving VIP are much larger and statistically more significant. So who is at risk? In terms of companies whose stocks are traded on US exchanges MPEL and WYNN are most exposed in that order and LVS while still generating a significant portion of its revenues VIP, is more of a Mass operator particularly in terms of profits.