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Macau Gaming Sector Could Make a Comeback in 2019

Macau gaming stocks fell precipitously in 2018, as fears over a slowing Chinese economy and the US-China trade war weighed heavily on market sentiment. Melco International Development (0200.HK) fell 28% and Galaxy Entertainment (0027.HK) fell 18.4% in 2018.

Yet they’ve rebounded this year, partly thanks to strong numbers from Chinese New Year, a major travel and leisure holiday for the Chinese population. While some investors remain skittish over the industry’s drop in VIP spending, we believe the sector’s shift towards mass-market customers will create stable, long-term growth.

Corruption crackdown forces shift toward the mass market

Macau casinos’ early claim to fame and rapid growth were fueled by large junkets of visiting VIP gamblers. Gaming stocks peaked in 2013, but Chinese President Xi Jinping’s crackdown on corruption heavily impacted the industry, with its stocks declining by 30%-40% in 2014. Many viewed Macau casinos as a hub for corrupt government officials and money laundering, and Macau was a big target for the anti-corruption campaign.

While Las Vegas casinos generate two-thirds of their revenues from non-gaming entertainment, in Macau 70%-80% of revenues come from guests coming to gamble. But since the government’s crackdown, Macau has been striving to reinvent itself as a family-friendly venue, with theme parks and shows more suitable for family trips rather than serious VIP gamblers.

That new strategy seems to be working. Chinese visitors to Macau reached nearly 900,000 during the week of Chinese New Year, up 26% from last year. In the fourth quarter of 2018, earnings for Wynn Resorts and Galaxy Entertainment beat analyst expectations. Melco Entertainment also reported that its hotel rooms for the Chinese New Year period were completely sold out.

Hong Kong-Zhuhai-Macau bridge could increase visitors

Another impetus for growth is the opening of the Hong Kong-Zhuhai-Macau bridge last October. The 55km bridge from Hong Kong took several years and $17.3 billion to build. However, it seems to be boosting visitor numbers. On the third day of the Chinese New Year Holiday this year, 159,800 people were recorded arriving at and departing from the Hong Kong

side of the bridge. Analysts say that thus far, the majority of the traffic has consisted of mass-market visitors to Macau casinos rather than VIP customers.

While there are concerns over the state of the gaming industry in Macau, let’s not forget that Macau is the only place in China where gambling is legal, and 70% of Macau visitors are mainland Chinese.

This makes Macau gaming a built-in cash cow, as just six operators have licenses to operate casinos there. This makes it an oligopoly industry with limited barriers to entry; it’s still well-positioned for long-term growth. Investors should try to get in now while market sentiment on the sector is still muted and stock prices are cheap.

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Disclosure: Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance. Ker Zheng doesn't own any shares mentioned above.