In September, the Macau gaming market posted a 3.4% decline, ending a staggering period of growth that has seen Macau overtake Las Vegas as the largest gaming market in the world.
The primary culprit for the slowdown has been the increasingly tight visitation restrictions that the Chinese government has placed on visitors from mainland China. In short order, Chinese mainlanders went from being allowed to visit Macau once every two weeks prior to June, to being allowed to visit once per month, and then once every two months, and now only once every three months. The effect has been noticeable in the diving stock prices of the casino operators in Macau, namely Las Vegas Sands
However, the response from the casino operators toward the Chinese government's policy has been mixed. Whereas Las Vegas Sands has understandably been vocal in its disapproval of the tightening visa restrictions, both Wynn and Melco Crown have been quite supportive of the Chinese government.
Here is some insight as to why. Two weeks ago at the Global Gaming Expo (G2E) in Las Vegas, Melco Crown Executive VP and CFO Simon Dewhurst delivered a rather electrifying monologue explaining Melco Crown's view of the situation at the end of a conference session entitled "State of the Economy: Gaming CFO Roundtable."
The following is Dewhurst's response to a question from the audience asking what kind of additional risk premium is required in valuing the stocks of the casino companies operating in Macau, given the "volatile" regulatory environment that exists in Macau due to the Chinese government:
I think that's a very, very specific question to a specific set of conditions we are facing right now.
As an operator on the ground in Macau, we spend a huge amount of time conversing with the government in Beijing. We spend a lot of time advising the government in Beijing. They are very open to listening to what their partners think about market conditions. And so the perspective that we have of what it is like and whether there is a risk premium associated with working with Beijing is very, very different from what I hear when I spend time with equity investors in the U.S. and elsewhere around the world.
I actually think we have an incredibly stable regulatory environment, and a regulatory environment that has a view that goes out across the next five development plans that exist in China and reach out for 25 years from where we are today. And so that's the mentality that exists in Beijing.
What they are trying to do in Macau ... to put it in simple terms ... they are trying to allow for the broader economy to catch up with the extraordinary growth that has occurred in an industry which happens to generate 70% of the tax revenue in Macau, but it only actually employs about 23% of the local workforce. And so 77% of the workforce hasn't been benefitting from this extraordinary growth in the gaming industry, and it's creating some social instability in the market place. And there's nothing that gets our friends in Beijing hopping up and down more quickly than if they sense that there is an area of social instability in any of the provinces within China.
So it's a short term issue. The broader economy needs to catch up. It will do so over the course of the next 1-2 years, at which point the authorities in Beijing will readjust the lever into Macau. Fundamentally, nothing has changed. Nothing will change, in my view, in terms of the role that Macau plays as the pressure release valve for the gambling instincts of the Chinese populace.
Closing thoughts
Dewhurst's monologue highlights one of the major issues that American investors encounter when investing in companies that do business outside of the United States: cultural differences. For one thing, Americans tend to think of five years as the long term; in contrast, five years is relatively short-term for the Chinese in the grand scheme of things. For another, casino regulation in the United States is driven primarily by the desire of state governments to generate gaming tax revenue as quickly as possible, whereas the Chinese government is more concerned with social issues.
This issue is not exclusive for investors looking at companies, like Melco Crown, that do the bulk or all of their business outside of the United States -- it is relevant to any company that does business outside of the United States (or in China in particular in this case), and that includes companies such as Coke
That said, it is refreshingly noteworthy that -- in stark contrast to their rival Las Vegas Sands -- Melco Crown and Wynn Resorts have taken the long view in supporting the Chinese government with regards to the visa restrictions despite the short-term impact on their stock prices.
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