Is Macau in Big Trouble or About to Turn a Corner?

By Markets Fool.com

Continue Reading Below

Are new resorts like The Parisian in Macau a sign of coming oversupply or will it draw new customers to the region? Image: Las Vegas Sands.

Depending on who you ask, Macau could be in dire trouble or primed for a new round of growth. A sharp drop in gaming revenue over the past year makes the dire predictions easy to make and many analysts and investors have become bearish on the region. Complicating matters, Galaxy recently opened Phase 2 of its resort on Cotai and five more resorts in the next two years will add more supply to the market.

But there are still investors bullish on Macau. Las Vegas Sands' CEO Sheldon Adelson leads the Macau bulls, recently touting new resorts coming to the Cotai region saying, "Supply will create the demand." Business Insider writer Linette Lopez wrote that that comment alone showed his "Macau delusion," but it may not be as crazy as it seems. Here are a few things we should look at in Macau and why new casinos may not be as they might seem for existing resorts.

Macau is two very distinct markets
In Macau there are very big differences between what they call VIP players and the mass market. VIPs in Macau usually come with junkets, who provide a line of credit and actually have their own gaming rooms within a casino. They take care of the VIPs and for their service they take a cut of their losses. They're also the ones who make it possible to launder money out of China, something I wrote about here, which is one reason why VIPs have been crushed by a corruption crackdown in Mainland China.

The mass market in Macau is more like gambling is in Las Vegas. People come to town for a day or two with pockets full of cash and they play games of chance and more than likely lose a big chunk to the casino.

Continue Reading Below

The difference is important when looking at trends in Macau. VIP play has been crushed over the past year while mass market gaming play has fallen less and is now at levels we saw as recently as mid-2013.

Data source: Macau Gaming Inspection and Coordination Bureau.

The 29% decline in first quarter mass market play is big, but it's not as big as the 42% decline in VIP play. Another reason this is important is because mass market players are three times as profitable to the casino because they don't have to pay the same kickbacks or incentives to junkets.

Supply does bring demand ... sort of
Sheldon Adelson's comment that supply creates demand may not quite be correct in the literal sense. What he means is that a critical mass of resorts will attract more visitors to Macau, potentially even more than the number of rooms added. It's a one plus one equals more than two kind of idea.

You can see this concept at work in Las Vegas. The draw to The Strip isn't a single resort, it's the mass of resorts that are in one location. It would take weeks to explore every venue at every resort on The Strip and that's a big part of the region's excitement.

Wynn Palace will be coming to Cotai in mid-2016. Image: Wynn Resorts.

In Macau, Adelson built The Venetian Macau and it was a lonely resort on the Cotai Strip less than a decade ago. Today, Melco Crown is there, Galaxy has a resort, and Las Vegas Sands has built two more resorts. But it's additions from Wynn Resorts , MGM Resorts , SJM, an addition from Galaxy, as well as new properties from Las Vegas Sands and Melco Crown that will create a critical mass. That's when the Cotai region will be the draw the Las Vegas Strip is in the U.S.

At least that's the theory.

Macau will be all right
Analysts are rushing to try and guess what will happen to gaming stocks based on a week or a month's data, which is a fool's errand. Long-term, the region is still an incredibly important entertainment region for China and more than a billion people live within easy travel distance of the city. That will keep Macau's casinos busy, even if they're not printing money as quickly as they were a year ago.

Long-term, the industry will be fine and building more resorts will improve the draw for travelers from around the world. It may be a rough year or two for gaming investors but that's what happens when the hot streak the industry has been on comes to an end.

The article Is Macau in Big Trouble or About to Turn a Corner? originally appeared on Fool.com.

Travis Hoium owns shares of Apple and Wynn Resorts, Limited. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.