Chinese stock fall will affect Macau, Vegas casinos

Jan 12, 2016 3:00 AM

One of the biggest casinos in the world, the Chinese Stock Market, took a big drop in value last week and that does not bode well for Chinese New Year in Macau, or for any casino destinations catering to the mainland Chinese for the coming months.

Chinese New Year is set for February 8, and normally with its week-long set of holidays and festivities would set the stage for great business in the casinos of Macau and Las Vegas. But with the market drop on top of tightened controls and restrictions on money movement, Chinese New Year is not setting up to be very robust for gaming activities from the Chinese consumers going to Macau and to a lesser extent Las Vegas.

Culturally at Chinese New Year, senior family members are expected to give “red envelopes” (envelopes with cash gifts) to their juniors, employees, family members and other subordinates in the relationship food chain. These are not envelopes with small amounts of money. For example, employees receiving red envelopes will generally expect somewhere between 1 to 6 months’ worth of wages.

On top of that, and also culturally, it remains a common practice to settle up debts before the start of the year. So there should have been no surprise when some of the 250 million retail stock account holders started selling shares to get ready for their annual cultural obligations. As always, when a market dips, analysts feel compelled to try and provide a simple explanation. In this case they pointed to the then pending conclusion of restrictions on the selling of shares by certain large insiders of companies and certain large institutional holders as the precipitous culprit

On hearing this, even more retail sellers entered the market pushing values further down and the regulators halted trading, which triggered even more sellers wanting to sell into the market. Concurrently, as Chinese market values evaporated companies outside of China, which invest in China or do business in China, also suffered declines in share prices, and as those values dropped it forced leveraged positions to have to unwind and ultimately sent ripples throughout global stock markets.

In the midst of these declines the Chinese government devalues their currency to attract manufacturing orders, North Korea claims they have an H- Bomb, and the public jitters amplify. Bad news begets panic actions, which begets more bad news and becomes a self-feeding cycle till it runs its course.

Amid this storm, the casino industry is buoyantly out there marketing and soliciting customers to come to their respective properties to celebrate and gamble during the coming Chinese New Year. Alas, casino gaming is a discretionary spend and when customers’ discretionary money dries up there is no surprise that casino revenues will decline as well.

I am not forecasting doom or malaise for all the industry, just that we are likely to see a continuation of the declines in the premium segments of the casino customers for the foreseeable future and most particularly the next two months in Macau and to a lesser degree the “whale” segment in Las Vegas. While Macau’s decrease in play from high-rollers has been widely reported, it has gone almost unnoticed that high-end baccarat play in Nevada is down over 21 percent with no seeming sign of near term reversal.

As I have often stated in this column, long term I remain a big believer in Macau. It remains a much bigger gaming destination than Las Vegas and is likely to remain that way as long as China allows its citizens to go there. While there are some in the analyst world who assert the new resorts scheduled to open in Macau are not going to generate new business but cannibalize existing older Macau properties, I suggest that long term the collective properties will provide their own form of synergy.

It is inevitable that the weaker properties will either have to get creative or die, but as all the properties are marketing to customers from outside of Macau, the collective marketing efforts only enhance and stimulate consumer interest and demand for trips to Macau, which is the same formula that generally worked in Las Vegas from the 1950s until 2007.

2016 is the Year of the Monkey, unfortunately it just does not look like there will be very much monkey business in Macau or Las Vegas for this Chinese New Year celebration.

The Analyst is an experienced gaming industry executive who offers insight each week on events and issues affecting the industry. Contact The Analyst at [email protected].