Heading to Macau, Thoughts on the Slowdown Part 2/2

I am back from my visit to Macau & Hong Kong. The industry has definitely a beating with the general economy, and the corruption clampdown.

Many casinos rely heavily on VIPs to generate the bulk of their casino revenue, as opposed to the mass market audience.

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Interestingly enough, while flipping through my notes from the London Value Investor Conference in 2014, one of the presentations  touched upon the casino industry. You can really see how dramatically market sentiment has swung towards depression in less than a year. Optimism always comes at a cost.

The contranian in me is however optimistic.

Even in its current state, the casino industry is a highly profitable industry with most of the upfront capital expenditures (i.e. the casino already paid up for). Its a business tied to the general performance of the economy, and you can take a look at the businesses itself performed in 2008/2009 to get a feel for their profitability.

Despite the rally (and subsequent fall) in China stocks earlier this year, its worthwhile to note that the stocks were already beaten up.

Based on my conversations on the ground, the industry seems to be stabilizing. Still at current prices, I think many stocks will do well if the casinos simply survive this dry patch. The headlines have been overwhelmingly bearish over the last few months. Here are just some of them:

Macau Analyst Who Called Stock Drop Says Worst Yet to Come

http://www.bloomberg.com/news/articles/2015-03-04/macau-analyst-who-predicted-stock-drop-says-worst-is-yet-to-come

As Macau casino stocks sink, long-term investors look past the abyss

http://uk.reuters.com/article/2015/05/03/uk-macau-stocks-idUKKBN0NO0TO20150503

Macau casino giant SJM Holdings sees profits plunge

http://www.channelnewsasia.com/news/business/macau-casino-giant-sjm/2045860.html

Still, my gut feel is that a lot of its priced in. Of course, casino stocks could do even worst if the slowdown in China persists. On the bright side, the Hong Kong Zhuhai Macau Bridge will be completed at the end of next year, and the government is focusing its efforts on the Hengqin to further moves its revenue base from just gambling. At current prices, you don’t need a lot to go right for the stocks to rebound from their lows.

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