Photographer: Billy H.C. Kwok/Bloomberg

China Property Market Puts Macau's VIP Gaming Recovery at Risk

The luck is running out

For those wondering whether to raise or lower bets on Macau's VIP gaming business, look no further than China's real estate market.

According to Nomura Holdings Inc.'s analyst Richard Huang, the two markets are "strongly correlated" and a series of property tightening measures in the mainland will dampen the industry that has just recently begun to recover from three "brutal" years.  

Source: Nomura

Not only that, Nomura's gaming, lodging & leisure research analyst for Asia ex-Japan noted that VIP gross gaming revenue growth is also strongly in line with the price movement of China's commodities market as well as the global oil market.

Source: Nomura

"I think there's a logical explanation here because after all, it means a lot of Chinese people are earning wealth from the property market as well as the commodities market," said Huang in an interview. "And part of the money would flow into Macau's VIP gaming."

Source: Nomura

As a result, Huang expects the recent pick-up in the VIP gaming segment to be short-lived.

Having been slashed by two thirds to about $10 billion this year from $30 billion in 2014, the analyst said, the VIP gaming market has begun to recover in the second half of this year.

"Because of the recent recovery, some are turning bullish on its growth prospect, but we do not share that optimism," said Huang. "Our in-house view is that the property market will soften next year, which will have a negative impact on the VIP segment."

The country's overheated property market shows signs of cooling after Beijing introduced tightening measures to more than 20 cities in the third quarter. New-home prices in Shenzhen, the nation’s hottest property market earlier this year, fell 0.3 percent in November from October, the second straight month of declines. 

In addition, Beijing's latest efforts to contain capital outflows bode ill for its recovery, according to Huang, as the growth of the VIP gaming sector is a "direct consequence" of capital outflows from China.

"Having seen the recent recovery [of the VIP segment], the central government may have been encouraged to roll out more tightening measures to curb outflows, which we have already seen lately," said Huang.

The policy direction doesn't help either, according to Huang, as both the Macanese government and the central government have been trying to "diversify the local economy" toward non-gaming, and, within gaming, toward mass gamblers and away from VIP clients.

"A recovery in the VIP market goes directly against what Beijing and the local Macanese government are looking for," he said, concluding that he expects 5 percent growth to be what both governments are willing to tolerate.


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