Inside Asian Gaming

INSIDE ASIAN GAMING | February 2013 4 T he ancient Chinese believed a snake in the house was a portent of good things—it meant the family would not starve. Whether you believe that or not, what’s for sure here in Macau on the eve of the uncoiling of the “Year of the Snake” is that no one connected with the world’s largest casino market will be going hungry. Forecasts out of the gate are bullish. Analysts are talking about anywhere from 10% (Citigroup) to 18% (J.P. Morgan) growth coming off a 2012 in which the industry rackedupMOP304.14billion ingross gaming revenue (US$38 billion), surpassing a banner 2011 and handily at +13.5%. While this was well off the 26% average of the previous five years, no one is complaining, given the challenging environment economically and politically that prevailed in China through most of 2012 which contributed to making it the worst year for VIP revenue growth (+7.5%) since the 2008-09 global financial crisis. What it implies is a market that will be about US$4 billion to $7 billion larger than it was in 2012 and more profitable by upwards of $1 billion or more, taking last year’s mean EBITDA margin of 22% as a benchmark, Snakes and Ladders A VIP renaissance, a booming mass market— what’s not to like in this most auspicious of Chinese New Years? with the obvious caveat that operating leverage tends to vary widely from operator to operator and casino to casino depending on business model, revenue mix and other factors. Expectations of a recovery in the VIP sector, which still drives better than two- thirds of revenues, 68% of GGR in 2012, figure prominently in everyone’s crystal ball. And given the close correlation historically between growth in the rolling chip segment and themacroeconomics of mainland China, and particularly of neighboring Guangdong Province, it augurs well for 2013 that experts are confident more or less that the world’s second-largest economy is bouncing back from successive years of relatively sluggish growth. China GDP fell froma 10.4% increase in 2010 to 9.3% in 2011 to the weakest pace in 13 years in 2012 at 7.8%. But exports are expected to recover this year on signs that demand is on the mend in Europe and the United States, and this, coupled with looser monetary policy, increased government spending and rising domestic demand, will drive growth this year in the range of 8.4%-8.6%, according to recent estimates by China’s Bank of Communications, the World Bank and HSBC. The economy beat expectations in the fourth quarter, growing by 7.9% and reversing seven consecutive quarters of slowdowns. Not surprisingly, VIP revenue returned to the black after a 1% decline in Q3, which happened to be the first quarterly contraction in three years and coincided with the worst three months for GDP growth since 2009. Rolling chip turnover was up 6.8% in Q4, and the sector took in MOP54.7 billion ($6.83 billion), its best three revenue months in absolute terms ever, capped by a December that saw revenue jump 16% year on year on an 8.8% increase in turnover. “Macau VIP gaming revenue normally lags the macro indicators such as money supply, PMI [purchasing managers index, a gauge of manufacturing sector health] and Guangdong export growth by around three to four months,” notes Kenneth Fong, who covers gaming for J.P. Morgan out of Hong Kong. “Over the past few months, we have gradually seen all these macro indicators improve. When this is coupled with the gradual recovery of the global economy, these factors could collectively lead to an improvement of external demand, and hence exports. This should continue to drive gradual improvement in the VIP segment.”