Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

It's natural to be scared of betting big just after losing a great hand. But savvy gamblers know that just because the first game played out one way, the next won't necessarily follow.

That's the case in Macau, where a junket operator's recent warning of large-scale money-laundering investigations has sparked a sense of deja vu among investors fearful a renewed crackdown on Macau's high rollers could deal another blow just as the gambling hub was starting to feel steady again.

Feeling Groovy
Revenue from VIP gamblers has rebounded in recent quarters
Source: DICJ, Instinet research

The Bloomberg Intelligence Macau Gaming Index has dropped 4 percent this month, compared to a 6 percent rise in the MSCI China Index, on reports of mainland police investigating questionable money transfers and freezing accounts of junket operators who find and ferry in wealthy players to gamble large sums, mostly on credit.

When the Chips Are Down
Shares in Macau gaming companies have fallen 4 percent this month compared with a 6 percent increase in the MSCI China Index
Source: Bloomberg

The worries are understandable: Memories of President Xi Jinping's anti-corruption drive, which began after the last twice-a-decade Communist Party Congress in 2012, have only recently faded with year-on-year revenue growth among VIP customers rising by double digits for three straight quarters.

As officials try to manicure the country's finances ahead of the 2017 congress, investors might fear casino operators will again bear the brunt of Beijing's political maneuvering.

But this time around, things could be different. And investors who look past the politics could benefit by scooping up some bargains.

For one, there's an end game in sight. The most recent Macau purge is coming before the congress this time and there are just a few months to go before the fall confab.

Meanwhile, the very public investigations into financial heavyweights like Anbang Insurance Group Co. and overseas dealmakers such as HNA Group Co. and Dalian Wanda Group suggest officials will spend more time going after entities whose ballooning debt levels and off-balance-sheet investing pose the largest systemic risks to the country's financial sector, rather than showy casino patrons who flaunt their wealth.

While Beijing's tightening grip on VIP gambling in Macau reflects real concerns over capital flight, this need not choke the life out of the city's leisure business -- particularly as casino operators develop alternative revenue streams that are less dependent on money flows from the mega rich.

Good Hand
Year-over-year growth in casino table wins among both VIP and mass markets reveals a recovery among Macau operators
Source: Bloomberg Intelligence

Companies including MGM China Holdings Ltd. and SJM Holdings Ltd. are already much less reliant on high rollers than they used to be, with the VIP share of casino revenue slipping below 50 percent.

Low Rollers
VIP customers are making up a smaller share of casino revenue among Macau's largest operators, but they still bring in more than half of gambling revenue at Galaxy, Wynn Macau
Source: Bloomberg

They're also running tighter businesses, with return on capital, profit margins and return on assets rising in recent quarters.

Tighter Ship
Profitability measures among Bloomberg Intelligence Gaming Index members have improved in recent quarters
Source: Bloomberg

Tourists are visiting to do more than gamble, too: Macau's retail sales and spending in the first quarter rose by 12 percent and 16.6 percent respectively from the year before, according to the Macau Statistics and Census Service.

Meanwhile, companies including MGM, Sands China Ltd., SJM and Wynn Macau Ltd. are opening new resorts. Diverse attractions such as concert halls and gourmet restaurants should help boost takings, as mass-market guests from mainland China embrace the lower prices ushered in by additional competition.

As casino operators rely less on junkets, they will have to spend more on other kinds of marketing to appeal to lower-income customers who can provide a more dependable source of revenue. That will also help fend off other destinations trying to make inroads in gambling, such as Japan and Vietnam.

A share sell-off might even usher in some good news in the form of contracting valuations. The enterprise value to Ebitda multiple for the BI gaming index is expected to drop to 13.6 in the third quarter of this year, from a second-quarter multiple of 17.4, Bloomberg estimates show.

Rich Stock
Valuations of Macau's casino operators have become rich in recent quarters, so share weakness could help unearth some bargains
Source: Bloomberg

Ignoring politics is almost impossible when doing any kind of business in China. But if casino operators continue to focus on what they can control, they might be able to tilt the odds back in their favor.

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

To contact the author of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

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