Consumer

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Things seem to be going pretty well in Macau right now. 

Shares in Galaxy Entertainment, Sands China and SJM Holdings have all risen more than 10 percent over the past month. Gross gaming revenue in July fell less than estimated and is showing signs of bottoming out.

As long as no one blows it by dumping a load of new hotel rooms on the recovering market, the territory might just make it out of the woods.

Whoops.

The Wynn Palace opening Monday will add some 1,700 lavishly appointed rooms to the market, along with crushed-diamond facials and air-conditioned gondola rides. Then next month Sheldon Adelson's Sands Parisian will open a few hundred meters away, contributing 3,000 more rooms plus a replica of the Eiffel Tower.

Together, the two resorts will increase the number of Macau hotel rooms by about 15 percent, the biggest two-month jump since at least 2009.

Open House
Macau will add hotel rooms over the next two months at the fastest rate since at least 2009
Source: Macau Direccao dos Servicos de Estatistica e Censos
Note: Forecast figures based on Wynn Palace and Sands Parisian room numbers.

Hotel rooms obey rules of supply and demand similar to those governing copper and wheat, so a surge of new capacity can be expected to put downward pressure on prices, absent a countervailing increase in demand.

There are signs that price effect is happening already. Revenue per available room in Macau has been declining on an annual basis for 18 months straight, and average daily room rates in March and June were at their lowest levels since 2010.

That doesn't sound so great -- so why is Bloomberg Intelligence's index of Macau's six casino stocks trading on the best forward price-earnings valuation since early 2011?

High Stakes
Bloomberg Intelligence's index of Macau's six casino operators is trading at its richest valuation since 2011
Source: Bloomberg Intelligence
Note: Shows blended forward 12-month price-earnings valuation.

Well, remember that countervailing increase in demand? It looks like it might be showing up just in the nick of time.

Hotel occupancy in the territory in June was stronger for the season than in any of the past five years bar 2014, the peak of Macau's casino market.

Aces High
Hotel occupancies in Macau have been looking notably strong, especially considering it's low season
Source: Macau Direccao dos Servicos de Estatistica e Censos

In four-star hotels such as Adelson's Venetian Macao, 85.7 percent of rooms were occupied, outstripping even 2014's June figure. Five-star hotels, the market in which Steve Wynn is playing, are trailing the four-star places, but still saw the best June occupancy for any of the last five years except 2014.

That's a particularly impressive result when you consider that, cheap rooms or not, this is low season. Occupancy rates tend to tick up by between 5 percent and 10 percent above June levels in the second half of the year, and Golden Week in the first week of October is one of the strongest periods after Lunar New Year.

There's a feedback effect that may come from all those extra hotel rooms, too. Occupancy rates of 80 percent to 85 percent are typically as close to full house as you'll see in the hotel industry. The shortfall from 100 percent normally indicates rooms that are empty midweek but still booked out when demand peaks on Friday and Saturday night.

So for all that Macau's casino operators fret about the caps on gaming tables imposed by the government, at present one of the most significant hard constraints on revenue is that there simply aren't enough hotel rooms to accommodate all the people who'd like to come.

Gross gaming revenue, the territory's main measure of gambling spend, is already limping toward a recovery. After 26 months of declines, it may finally see a year-on-year increase in August if revenue trends in the first two weeks of the month play out, CICC's Chris Kwai wrote in a note to clients last week.

Add 15 percent more hotel rooms and, all things being equal, there's a good chance of getting 15 percent more gamblers. If that in turn translates into 15 percent more revenue, things for Macau's casino operators will be looking distinctly more lustrous by the time Golden Week starts.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net