China’s Economy Is Adding to Macao Woes
China, the key market
The Macao region relies heavily on the Chinese mainland because it garners a huge majority (~67%) of its visitors and VIP gamers from China and its neighboring countries. The weakness in China’s economy will thus adversely affect the spending capacity of the people in the country, which in turn will likely lead to a fall in the number of visitors visiting the Macao region.
Meanwhile, the devaluation of the yuan has only added to the woes of Macao, because this has made everything more expensive in the region.
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Chinese economy slowdown
For the second quarter of 2016, China’s GDP grew at 6.7%, in line with the government’s targeted growth. This growth is, however, the slowest quarterly growth in the past seven years, and it’s expected to slow down further to 6.5% during the next two years.
Previously, this target looked far-fetched, given falling commodity prices, overcapacity in many industries and low global demand, but the recent stimulus package now makes it look possible.
As a result, both the IMF (International Monetary Fund) and Moody’s, have updated their GDP forecast. Both the IMF and Moody’s forecast that China’s GDP will grow by 6.6% in 2016, as compared to the previous estimate of 6.3%. The Chinese government itself expects a 6.7% growth, but for 2017, GDP growth is expected to slow down to 6.3%.
Pockets of growth
According to China’s National Bureau of Statistics, China’s industrial production grew by 6% YoY (year-over-year) in July 2016, which is lower than the 6.2% growth in June 2016 and lower than its expected 6.1% growth. Remember, industrial production helps us gauge changes in business cycles and is a leading economic indicator.
For July 2016, China’s retail sales increased by 10.2% YoY, indicating growth in consumer spending. However, this is lower than the 10.6% YoY growth in June 2016 and lower than the consensus estimate of 10.5% YoY growth.
Fixed-asset investments and risks
Fixed-asset investments, meanwhile, grew by 8.1% in the first seven months of 2016. But China’s fixed investment dipped below the 10% mark for the first time since 2000 in May 2016.
China remains a key risk for global investors, however—especially as it tries to shift from an investment-based economy to a consumption-led economy.
Investors looking to avoid the risk of investing in a single casino company like Sands China (LVS), Melco Crown (MPEL), Wynn Macao (WYNN), and MGM China (MGM), may invest in ETFs that invest in casino stocks. These include the Markets Vector Gaming (BJK) and the Consumer Discretionary Select Sector SPDR Fund (XLY).
In the next and final part, we’ll discuss valuations and valuation drivers.