Bursting stock bubble adds no fizz to Macau GGR

When the mainland Chinese government's anti-graft campaign began to bite into Macau's gaming revenue last year, many analysts suggested the big players had fled to safer ground in the then-booming Chinese stock market.

But that bubble has now burst, with the Shanghai Composite Index seeing its worst daily fall in eight years in August, sending shockwaves through global bourses. If that boom is now well and truly over, is there any argument for a corresponding turnaround in Macau?

A recent report from Macquarie Capital Securities didn't contain much reason for optimism, stating most experts couldn't say whether Macau's Gross Gaming Revenue (GGR) would recover, plateau or continue to plummet.

“Over the past two months, we met with over two dozen industry participants and nobody had clear visibility on where GGR would head a month out. Even for gaming operators themselves, visibility can be as low as just one week,” wrote analysts Kai Tan, Maggie Jiang and Jensen Hui.

“We believe the desired GGR recovery is not happening in the fourth quarter 2015, albeit [GGR] is declining at a slower rate of -27 percent year-on-year versus -37 percent year-on-year in the eight months of calendar year 2015.”

The Macquarie analysts did, however, find a perceived link between share markets and GGR. “We expect the recent overshoot of Macau GGR decline to reverse in the next couple of months. The [Macau] performance discrepancy since July 2014 seems to coincide with the overheated A-share market during the period; i.e., affluent SME [small- and medium-sized enterprise] owners spent more money investing in the A-share market rather than visiting Macau.”

A quick look at the numbers shows the extent of that bubble. Although the market’s decline since June has been spectacular, with the Shanghai Index having lost a third of its value, it is still up by more than 40 percent from the same period last year, according to Bloomberg figures.

Deutsche Bank analyst Karen Tang agrees there is a strong relationship between stocks and GGR, estimating a 70 percent correlation between the Shanghai A-share market with Macau’s VIP gaming revenue.

However, a leading analyst has warned not to expect VIPs to flock back to the Cotai Strip's embattled casinos and claims, despite what many other analysts say, that there is at best a “tenuous” link between China's market movements and Macau's still-plunging gaming revenue.

“The first thing to talk about with Macau gaming revenue is that the link between movements in the Chinese Stock Markets and the wealth effects in other markets is very tenuous,” said the Economist's regional editor for Asia, Duncan Innes-Ker, who has been analyzing China for more than a decade.

Investing on the stock exchange may be just seen as a different type of gambling, but Innes-Ker suggests that the high-roller casino customer isn't necessarily the type to be having a flutter on margins as an alternative to baccarat or poker.

“The bigger factor in Macau is the anti-graft campaign from the Mainland and the immediate impact of that, as regulators began to crackdown and the VIP high-roller, is that they basically didn't turn up in the same sort of numbers they used to,” he said, adding that the claim that VIPs turned to the surging markets at that time may also be off the mark.

“You can't have your cake and eat it too,” he said. “If revenue is falling by 30 percent in the last quarter of 2014 because people are investing money in the stock exchange – you can't then turn around and look at September 2015 numbers falling at 33 per cent and say that's because of the impact of what is going on in the Chinese stock market.

"Arguably there is a position to take that people with money to spend within China – wealthy people with investment cash, that they did channel a large amount of that into the stock market during the boom time and that did have an impact on the domestic housing sector, for instance, but in terms of its impact on the gambling sector in Macau, the effects are very much secondary to what is going on with the anti-graft campaign.”

Other analysts have also argued that any correlation may be more on the downside than the up, with the fall in stocks hitting the personal wealth of the SME owners, making them less likely to take a flutter in Macau.

There does, however, appear to be a link between the stock market and Hong Kong Jockey Club betting numbers – so much so that some pundits are calling the HKJC numbers the new “Big Mac Index” - referring to the famous index created by The Economist that measures a country's economic strength by the comparative cost of a hamburger.

The only flat spot on what has been a steep rise in turnover in the last decade coincided with the 2008 Global Financial Crisis – when turnover failed to grow on the previous season, something that could happen again this term if early figures are any indication.

Hong Kong Jockey Club chief executive Winfried Engelbrecht-Bresges says

totalizator holds have been “resilient”, although the numbers may not be so pretty once you scratch beneath the surface.

The Jockey Club's handle has taken a body blow – most of the stock market losses occurred during racing's summer break and there were bleak forecasts from some officials when racing returned on September 6.

The Jockey Club does not entertain junket operators or offer credit betting and it is an approach that has paid off until now, with betting numbers being somewhat immune to the anti-graft measures. The figures have risen year-on-year for the last seven seasons to a record high of more than HK$100 billion ($12.9 billion) in 2013-14, climbing again to $107.9 billion in the season ending in July.

However, the first meeting this season saw only a slight rise in turnover compared to the corresponding fixture 12-months earlier – a hold of HK$1.1 billion on 10 races, up 1 percent on last year - that figure was also helped by commingled betting from overseas jurisdictions that hadn't been on board in the previous year.

Commingled bets from New South Wales were added to the pools this week and will be sorely needed, along with simulcast betting, to boost the flat figures. A comparison of turnover from the first 13 meetings of the 83 meeting season shows a slight drop in Pari-mutuel betting. In 2014 it had reached $14.93 billion 13 meetings in and 12-months later is $14.88 billion.

Back in Macau – with the VIPs gone – there doesn't look to be much light at the end of a tunnel that has now grown into 17-straight months of declining revenue.