There is no denying that Asia is a very exciting growth market. The problem is, it’s being juiced from many different directions making it unstable. A bullish concession can be made here over the long term though. I have little doubt that over the next, say, 30 years or so, the Asian gaming scene will grow much faster than any Western casino peer. That’s not to say though that any specific casino in the region will thrive over the same time frame. There is too much caprice and unpredictability to be able to stake capital in any single company and be assured that it won’t be nationalized or broken up or suffer a bankruptcy or at least severe decline.
Still, there is no denying the impressive show of G2E Asia 2019. The geniuses of the industry converging and sharing their know-how and advancements is going to be the key to long term growth, but of the gaming industry in general rather than the success of any specific company. Why is it so difficult to pick a winner here? Because historically, we have seen the crony monopolistic government-connected business model before, and it doesn’t work long term. Sure, it certainly leads to spectacular gains while the boom phase of the business cycle persists, but like a flame that burns hot and quickly runs out of fuel, the trip back down tends to be just as spectacular. When you have a government-supported monopoly, you get all the profits but you’re stuck with all the losses, too. You absorb the best fruits of the business cycle but you also suffer the biggest falls.
But let’s backtrack a bit. The fascinating thing about the whole Asian story, and not just in gaming, is that if we go back all the way to the very beginning of shares of stock in companies as a thing that exists in finance, it all starts in Asia. Austrian economist Ludwig von Mises once said that, though national economies almost always blur the line between capitalism and socialism to some degree, there is still a hard line that divides a capitalist economy from a socialist economy. That is, the existence of a stock market. This actually started with the British and Dutch East India Companies, founded in 1600 and 1602, though they didn’t do it very well or equitably, causing mass famines in India with their monopolistic policies on the way. The British East India company also happened to be the very first international government-sponsored drug dealer, trading opium under forced monopolies throughout Asia. It was brutal. It made the company lots of money, and the drug dealing lasted 148 years all the way until 1947.
Well, Asia has moved on from opium, kind of, but the tradition of monopoly continues to this day. In Malaysia, Genting enjoys full government support, making it very hard for competitors to operate. In Cambodia, it’s Nagacorp. In the Philippines, it’s PAGCOR and its underlings. All of these operations have been booming, but now they’re turning the other way. They all rely heavily on Chinese wealth, which, thanks to the relative pullback from totalitarianism after Mao, has skyrocketed, spilling over into the rest of the region.
The life cycle of a monopoly begins with market domination aided by government restrictions in favor of its partners. Then the benefactor grows and grows with more and more impressive profits. But then the monopoly gets lazy, spends too much handing out jobs to inefficient staff, not particularly caring that much because profits are so huge. (Saudi ARAMCO is the king of this type of business model.) But we’ve seen Asian financial crises before, most recently in 1997 when Asian currencies, with the exception of China’s Renminbi, collapsed against the dollar between 33% and 83% in the late 90’s.
Fortunately for these countries, they have learned their lesson that too much money printing eventually destroys your economy, and they’ve kept their monetary policies basically in line with those of the Federal Reserve, inflating their money supplies at more or less the same rate, especially since the last global financial crisis in 2008. This is in contrast to the decade from 1987 to 1998, the peak of the last Asian financial crisis, when money printing in Malaysia, Indonesia, Thailand, South Korea and the Philippines was completely out of control. So while they’re all more conservative with monetary policy, at least relatively, what they haven’t learned yet is that monopolies don’t last, and the overall superstructure of the current monopolistic Asian gaming market may soon evolve into something else more free and fair, but it will take some upheaval before the transition is made.
The main issue as I see it, is that back in 1997, China was able to escape the Asian financial crisis as its currency remained stable thanks to stockpiling dollar reserves as a result of trade surpluses with the US. But because it was able to escape the currency upheaval, China has been much, much looser with monetary policy than its other Asian neighbors and has not learned the same lessons. Chinese money supply has expanded by a factor of 20x since 1998. That’s crazy. By contrast, Malaysia’s money supply has increased by a factor of 7, and Indonesia by a factor of 10. That’s still a lot, but not compared to China.
There are already signs that the VIP market out of China is starting to decline again, and this time not exclusively because of a government crackdown. The decline of 2014-2016 in the VIP market was exclusively government policy. The trade war (which one could argue is also policy-centered) with the United States and the ongoing Chinese “Aporkalypse” pig Ebola virus leading to the culling of 200 million pigs in China (definitely not policy) are not going to help. As the prices of food in China are set to rise, the price inflationary effects of loose monetary policy are going to become apparent from the consumer level, which could cause the People’s Bank of China to tighten further while the trade war hits the VIPs at the capital level. The spillover that Genting, Nagacorp, and PAGCOR have enjoyed from China are on the ebb, for now. Whether there will be another wave up is hard to tell at this point. If I suspect it’s coming, I’ll call to get back in. I don’t see it yet.
I warned to get out of Nagacorp back in March. Since then, the stock is down 15%, currently sitting at $9.09. It could go down all the way to $4 or $5 before finding strong support. Genting Berhad has proven worse, down 35% since March. If tensions between the U.S. and China settle down, it could be time for a turn higher, but that’s not in the cards yet. No need to short these stocks in case the trade war gets resolved, but if you’re thinking of buying, hold off for now, and keep scaling out if you still own a substantial position.