Gordon G. Chang, Contributor
7/29/2012
China's Economy Claims Next Victim: Sheldon Adelson
The sinking Chinese economy is claiming another victim. His name is Sheldon Adelson.
Adelson, the Las Vegas mogul, can save himself by shelving ambitious expansion plans in Macau, a special administrative region of the People’s Republic of China. At the moment, however, it does not look like he will pull back in time.
Sands China, the Hong Kong-listed arm of Las Vegas Sands, intends to begin work on a new “family-oriented” resort on Parcel 3, a plot on Macau’s Cotai Strip, by November. That’s in addition to plans to build a fourth tower at the newly opened Sands Cotai Central and a building at the back of The Venetian Macau, the world’s largest casino. Sands China has, in addition to these properties, The Sands Macau and The Four Seasons Hotel Macau.
Adelson’s ambitious expansion plans—and the optimistic programs of other casino taipans—made sense when Macau’s gaming revenues were growing at an extraordinary pace. Revenues were up 58% in 2010 and 42% last year. This January, growth came in at a still-robust 34.8%. Revenues grew between 21.9% to 24.4% in the February-April period.
May, however, was a bummer, when they increased only 7.3%. June came in at 12.2%. The small uptick last month looks temporary. Investment banks think revenue growth this month will be a puny 3%.
For the full year, Fitch Ratings estimates Macau gaming revenues will increase in the 10%-12% range. “Our updated forecast implies low-to-mid single-digit market revenue growth for the rest of 2012,” the company said this month. At the beginning of June, Fitch predicted a far more optimistic 20% for the year.
In this deteriorating environment, investors have dumped Sands China, not liking Adelson’s large bets on Cotai. The two big victims in this spring’s sell-off have been Sands China and Steve Wynn’s Wynn Macau. Both stocks are down more than 30% since reaching highs in April.
And it’s not hard to see why they’re tumbling. In the second quarter, Wynn Macau reported a drop in revenue of 7.1%, the first quarterly fall since 2009. Sands China increased revenue to $1.48 billion, but it did not meet expectations of $1.52 billion. Net income fell 40.0% to $160.5 million from the same quarter in 2011.
And the deterioration in results looks like it will continue. Not only is construction creating more supply, demand is stalling. Macau, considered the world’s biggest and most profitable gaming destination, is all about Chinese tourists—especially officials looking to launder cash—but the heyday of gambling forays to Macau is rapidly coming to an end.
The Fitch forecast for Macau gaming is essentially based on its view of the Chinese economy, which it believes will expand 8.0% this year. China, however, cannot grow nearly that fast. In Q1, China in reality expanded in the low single digits. Q2 was far worse. Last quarter, the economy came in at about 0%—if it grew at all.
The collapse of Chinese growth rates has meant that fewer Mainland Chinese visitors are coming to gamble in Macau. That, in turn, has directly affected junket operators, which account for about 70% of Macau’s gaming revenues. The operators, which dominate the business in the casinos’ VIP rooms, bring gamblers from the Mainland and extend credit, especially to the most wealthy of them.
Junket operators are now having difficulty collecting debts. “On average, repayment period is around 15 days,” notes Kenny Leong, chief executive of Asia Entertainment & Resources, one of Macau’s top 10 junket operators. “Now some gamblers are asking for 2-3 days longer.”
Slowing repayment means junket operators have less money to lend out. Junkets have in fact restricted credit recently. And with less available credit, it’s no wonder Hong Kong’s South China Morning Post reports that revenue from the Mainland’s super-wealthy gamblers contracted in June year-on-year for the first time since 2008.
These problems threaten some of the junket operators, especially the smaller ones, which have a harder time collecting loans. Even one large operator, Amax Holdings, warned investors on June 29 that it may go out of business.
Amax’s problems could have been the cause of last month’s savage attack on Ng Man-sun, who controls the ailing concern. Six men severed tendons in Ng’s arms and legs while he was dining in the New Century Hotel, which houses a casino partially owned by Amax. The incident came within days of the murders of three Chinese gamblers—after the killing of two men in a hotel-casino and just before that of a woman near Adelson’s Venetian.
The series of violent incidents is triggering concerns that troubles afflicting Macau’s gaming industry will spill out into the streets. Adelson, however, remains undeterred. As he said in the Q2 earnings call, “Now everybody wants to give their right arm and maybe their left arm, if they’re lefties, to get into Cotai.” After the attack on Mr. Ng’s limbs, the American casino boss may not have been speaking figuratively.
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http://www.forbes.com/sites/gordonchang/2012/07/29/chinas-economy-claims-next-victim-sheldon-adelson/
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