Macau mass market gaming growth still in the shadow of a trade war

TAGs: Editorial, Macau

Statistics are like religion. We may think values are based on interpretation of data, but in reality, most of the time our interpretation of data is based on an outlook, weltanschauung we already have, what we assimilated in childhood or young adulthood, an outlook that doed not budge or change easily. It’s easy to make data fit our outlook or to reinterpret data, or manipulate data, or to simply ignore data that doesn’t fit into our preconceived notions of how things should be.

Macau mass market gaming growth still in the shadow of a trade warIt’s much harder for us humans to honestly change our outlooks if we see that the data just don’t fit. It’s almost impossible to be completely objective, especially considering that the amount of data flying out of the world’s servers is starting to rival the size of the known universe. Even picking the data that we want to focus on and ignoring the data we don’t care about is itself part of trying to make the world fit into our own systems.

Take VIP vs mass market revenues in Macau for example. The encouraging headlines all over the internet now are that mass market revenue growth has outpaced VIP revenue for Q2. That sounds good, and maybe it is. But maybe it doesn’t indicate anything important. Regardless, bulls will read the headline bullishly, making the argument that mass market revenues are more stable and therefore Macau is stabilizing into a less volatile market long term. Bears will either ignore the data point as irrelevant or reinterpret it as VIP growth slowing down too much, rather than mass market growth improving. Macau still depends on VIP, they’ll say, as over 55% of Macau gross gaming revenue is still from VIP. Even if mass market growth outpaces VIP, Macau is still heavily reliant on VIP and one quarter of outpaced growth doesn’t change that.

Let’s do a test, a game of sorts. I’ll put a link to a headline below and before you click on it, guess what year it’s from. Ready?

Macau GGR up 5.5 pct in 2Q on mass market surge

Now that you’ve clicked on it already, I can spill the rolling chips. The article is from July 16th, 2014, 4 years ago yesterday, right at the very beginning of the Macau crash. Here are the first few lines for added spice as they build the bullish case with the same tone that current reports on mass market growth are doing right now. These lines come right below a picture of a bustling Macau casino bursting to the brim with mass market patrons (emphasis mine):

Macau casinos reported gross gaming revenue (GGR) of MOP90.9 billion (US$11.4 billion) in the second quarter of 2014. That is up 5.5 percent from a year earlier, mostly on the back of mass market growth, show official data published on Wednesday.

Mass market gambling accounted for nearly 40 percent of Macau’s casino gaming revenue in the April to June period, according to the city’s Gaming Inspection and Coordination Bureau.

The high-margin mass sector generated GGR of MOP36.2 billion in the three months to June 30. Revenue from mass-market baccarat increased by 35.3 percent year-on-year to MOP28 billion.

The VIP segment fell by 5.8 percent year-on-year to MOP54.6 billion, dragging overall growth in the second quarter. It was also down from the MOP65 billion in the first three months of 2014.

Praise mass market growth all you want, but without VIP growth, Macau got crushed and many investors lost their shirts. Of note, mass market accounted for 40% of total revenues back then, which is around the same percentage as now.

And what is it with the date July 16th? As CalvinAyre reported yesterday, July 16th:

Union Gaming analyst Grant Govertsen forecast Macau’s gaming market would remain robust, registering double-digit growth in July.

“That mass outpaced VIP is also an upside surprise relative to most expectations and, trade war fears notwithstanding, is reason to remain bullish on the Macau names,” Govertsen said in an industry update dated July 16.

Maybe Govertsen is right, but it all hinges on the phrase “trade war fears notwithstanding”. When the VIP crackdown started four years ago, did anyone think that it would crush Macau stocks as much as it did? Very few. We are now at the very start of a trade war between the two biggest economies in the history of the world, led by two overpowering personalities, Trump and Xi. Xi is King of China for life now, and Trump won’t back down as long as he’s President. This could get much worse, and phrases like “trade war fears notwithstanding” is flippant, something you just have to take on faith that it won’t impact anything much. But nobody really knows, and embracing that unknown is what should be done here. Just waiting is one of the hardest things to do in trading or investing. But given the factors involved, waiting is what’s called for now in Macau.

Presently, the US tariffs already applied on China are small potatoes. They affect only $34 billion in goods and services, but President Trump has threatened to expand that to $200 billion more. That could alter China’s economy significantly, in ways nobody quite knows yet.


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