Macao's Casinos Are in Recovery: Analyzing February's Indicators

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Part 8
Macao's Casinos Are in Recovery: Analyzing February's Indicators PART 8 OF 10

Is Oversupply a Concern for Macao’s Casinos?

Slot numbers increase

Macao’s casinos’ $28 billion investment in integrated resorts is set to change the region’s gaming business. The capacity additions we discussed in the previous article are set to significantly increase the region’s total number of slot tables.

Is Oversupply a Concern for Macao&#8217;s Casinos?

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Three new resorts opened in 2016: Las Vegas Sands’ (LVS) Parisian Macao, MGM Resorts’ (MGM) MGM Cotai, and Wynn Resorts’ (WYNN) Wynn Palace. All three were allotted 250 new gaming tables each, similar to the number of tables granted to Melco Crown (MPEL) and Galaxy in 2015. These new tables led to growth of 12%.

Growth in slot tables coupled with a falling number of VIP visitors will likely be a major concern for Macao’s casinos going forward.

Hotel occupancy improves

Increasing room inventory makes sense only when resorts are actually able to fill these rooms. In February 2017, hotel occupancy for 3-, 4-, and 5-star hotels rose 6.7% to 88%. In the first 11 months of 2016, the number of hotel guests rose 14% year-over-year (or YoY) to 10.8 million.

The average occupancy rate for the same period was 82%, a rise of 1.4% YoY. In the first two months of 2017, hotel occupancy rose 5.9% to 85.3%.

Room rates fall

Increased supply has led to low room rates. In February 2017, room rates for 3-, 4-, and 5-star hotels fell 15.3% YoY to 1,280.5 Macanese pataca, or $160 per night. For the first two months of 2017, the average room rate fell 2.6% to 1,366.6 pataca per night.

However, according to brokerage Sanford C. Bernstein, Macao’s casinos will need to add more capacity in order to cater to peak demand during holidays and weekends. This may not be a very good strategy, as the internal rate of return on this investment will be likely bad due to capacity’s lying idle at other times.

Investors who want to avoid the risk of investing in single casino companies such as Sands China, Melco Crown (MPEL), Wynn Macao, and MGM China may want to invest in ETFs that invest in casino stocks. These include the VanEck Vectors Gaming ETF (BJK) and the Consumer Discretionary Select Sector SPDR ETF (XLY).


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