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Shares of gaming companies with exposure to Macau began to take a beating last last year, because of investor concerns of a slowdown in China. In fact, gaming revenue surged 42% in 2011.Despite the slowing pace of China’s economic growth, Bank of America analysts Shaun C. Kelley and Matthew A. Cole remain largely positive on Macau.
They expect 14% growth in Macau in 2012, down significantly from last year, but much better than the low-to-mid single digit growth rates for other gaming markets around the world. Singapore’s gaming revenue is expected to grow 13%, while Las Vegas gaming revenues are expected to rise just 4%.
Kelley and Cole point out three key considerations for Macau this year. First, there is room for a positive shift towards the mass market from VIP business:
“Beyond the macro, the story of 2012 is likely to be the mass market in Macau. Last year in our year ahead, we pointed out that the Macau “reality” was quite different from the destination-driven “dream” that Las Vegas (and increasingly Singapore) seem to promise, as Macau remains dominated by the VIP business… However, we see the potential for the growth dynamic to shift materially, and perhaps permanently, beginning in 2012. The tipping point could be the opening of Cotai Central beginning in March.”
Consider this – in Q2 2010 macau VIP revenues jumped 99% year-over-year (YoY), compared with 37% in mass market revenues. In Q3 2011 that had shifted significantly to 52% YoY growth in VIP revenues, compared with 44% in mass market. The mass market growth is being driven by a rise in Chinese household incomes and increased visitation from the mainland, growing 7% on average.
Second, Macau’s gaming industry survived the 2008 – 2009 global financial crisis, which shows how attractive it is to gamers.
And finally, company balance sheets are better than they were in 2008-2009 leaving room for operators to better deal with a new crisis.