Implication 1: Property prices affect VIP growth
The underlying motivation behind the recent monetary tightening announcements are to cool down property prices in China, which rose significantly (26%) over the last 18 months. Hence, the question in the minds of investors should also be that even if monetary policy is not tightened any further, will the PRC government’s desire to cool property prices have any implication for Macau’s property market?
Our analysis indicates that there is reason to be cautious on Macau’s VIP revenues (rather than mass-market revenues) given cooling property prices.
The chart below shows the relationship between property prices and Macau’s VIP gaming market, extending back to 2003, and illustrates that VIP gaming revenues in Macau are affected by property prices with a three-month delay. We can see that happening during several points in time, the latest being 2008/09. However, while the China-wide property price decline may not look as significant in 2008/09, the decline for Guangzhou and Shenzhen was more significant, with prices falling 15–35%.
Intuitively and based on our discussions with industry sources and junket operators, we think there will be an impact on Macau’s gaming market from cooling/declining property prices.
This makes sense, mainly because cooling property prices in a high inflationary environment (what China is currently facing) should make consumers feel as though they have less spending power and hence should pull back on discretionary spending (such as gambling).
Falling property prices have a negative multiplier effect on junkets
There is an even bigger reason why property prices have an impact on the VIP segment specifically. We understand property in China is one of the main sources of collateral that junket operators use against credit provided to VIP players. Hence, if property prices start to fall, junkets would be more cautious about the level of credit extended to VIP players. The inability to turn over the asset and turn the credit into cash (as property transaction volumes also decline) means the extent to which junkets can multiply their credit (or the multiplier effect) also declines. Hence, this would affect the level of VIP turnover in the market.
Mass market proves to be more resilient and less affected
Interestingly, our analysis also indicates that Macau’s massmarket revenues are not as sensitive to property prices in China. This is shown in the following chart, which illustrates that even at points in time when property prices have fallen, Macau’s mass-market gaming revenues generally bucked the trend and continued to grow. The 2008/09 period was an exception, although this was seen only in one quarter (which coincided with visa restrictions), following which, it grew rapidly.
We believe that the mass-market resilience is driven by two factors:
- The mass market relies less on credit and more on the savings/ earning power of consumers in China. Hence, money supply has less of a direct impact on gambling habits.
- Macau has not significantly penetrated the mass-market customer base in China. Hence, although some people may choose not to frequent casinos as economic circumstances change, they are replaced by others who have not been to Macau and want to visit there.
Dynamics for mass market remain positive
The analysis conducted by our retail analyst, Jessie Qian, and China economist, Paul Cavey, supports our view that although monetary tightening may affect the VIP credit environment, the mass market should remain strong as long as consumer confidence and earning power remains strong.
As shown in the chart below, while the reduction in workers incomes has been well publicised, private consumption has still grown quite strongly, supported by government stimulus measures.
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