Casino revenue in Macau could fall 25% in December according to Wells Fargo, continuing an ugly months-long slide that is beginning to claim another victim — Las Vegas.
Total casino revenue on the Las Vegas fell 5.6% to $US520 million in October as high-rolling baccarat players from China stayed home fearing President Xi’s corruption drive. Baccarat winnings fell 36%.
It’s worth noting that the people that can really make a difference in the high-roller market are few — maybe a couple hundred big time players from around the world — so when some (in this case, Chinese) players dip out, it makes a difference.
And it’s a problem Macau has been trying to tackle since earlier this year, when a billion dollar heist changed the way VIP games are financed. Macau used to adhere to a junket system in which high-rollers use investor money to gamble, and investors were guaranteed 1%-2% returns.
However, when one junket operator vanished with over a billion in junket cash, the whole system was disrupted and investors wanted higher returns. Xi’s corruption crackdown and China’s economic slow down exacerbated matters.
“We see no near-term respite for weak on-the-ground conditions in Macau,” Philip Tulk of Standard Chartered wrote in a recent note. “Junket/VIP’s long-time virtuous cycle has become a vicious one; funding/liquidity remains very tight, and the business model looks near broken.”
This is a big admission for a Wall Street bank. For months analyst notes have been riddled with excuses — a smoking ban was hurting revenues, they said; the corruption drive was a minor issue, they said; middle class Chinese players would soon rescue Macau’s revenue etc.
But none of that has turned out to be true, and analysts are grudgingly beginning to think about what will happen to Macau after the next 6 months.
“We believe last week’s rate cuts in China signal that the Chinese economic outlook is worsening, rather than a material change in policy,” wrote Wells Fargo analyst Cameron McKnight. “With short-term negative macro and Macau trends well understood, most investors have been inquiring about the longer-term outlook. We remain on the sidelines, all else equal, regarding Macau until we see either: (1) a sustained macro rebound, and/or (2) a change in China policies. Importantly, continued weakness in Chinese credit growth suggests that Macau gaming could remain weak for longer than expected (at least 6 months).”
Xi is visiting Macau next month, which analysts are considering an additional headwind for gaming revenue. It’s like having your dad visit your frat house.
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