Casinos bet on Macau growth but China a wildcard

* Macau's May revenues likely to see notable slowdown, says analyst

Gaming executives and industry players gathering for a convention in Macau on Tuesday may have to finally confront what they have been predicting for the past two years — a sharp slowing of growth in the world's hottest gambling market.

As China's economic expansion slows and high rollers from the mainland become more cautious, growth in Macau's gambling revenue could ease to around 11 percent year-on-year in May, analysts say. That is a healthy number, but a far cry from the up to 70 percent monthly growth rates seen in 2010 and even the 22 percent growth in April.

If May's growth is confirmed at 11 percent, it will be the lowest number recorded since July 2009. But revenues will still be a record for a single month.

"We are on the 18th month of a gradual decline rate. May will likely see a notable slowdown in the growth rate, but a record overall number," said Grant Govertsen, Managing Partner at Union Gaming Research in Macau.

The three-day conference at the Global Gaming Expo Asia, known as the G2E, focuses on the outlook for gambling in the region. Of particular interest is the emergence of new casinos being built in Macau, the Philippines and Vietnam at a time when growth is slowing in the formerly turbo-charged Asian economies.

Revenues in Macau, once a sleepy Portuguese fishing village and now a boom town and the biggest gambling market in the world, will be closely watched by Asian peers. Of particular interest is how much Chinese VIP spenders will be crippled by bad debt and the impact that will have on their gambling.

Macau, where casinos raked in $33 billion last year, is expected to make around $40 billion in 2012, with a growth rate estimated at 18 to 25 percent, down from 42 percent in 2011. High-spending Chinese gamblers account for around 70 percent of revenues, but their spending is dropping, analysts say.

The gap is increasingly being made up by China's emerging middle class, which has swarmed Macau's baccarat tables in record numbers. The mass market, made up of these newly moneyed Chinese, has so far been able to offset a dip in VIP revenues.

May's revenue figure will, nonetheless, be closely watched to see if there is a sharper decline than expected.

Billy Ng, director at Merrill Lynch Asia Pacific Ltd, based in Hong Kong, expects May growth at around 11 percent.

"It could go 13, 14 or 8, 9. If it turns out to be 8 or 9 … I think that's a very shocking number to see," he said.

Casino stocks listed in Hong Kong have fallen between 12 and 23 percent since the start of May. The stocks, which trade with high volatility on a daily basis, a re lagging an 11 percent drop in the benchmark Hang Seng Index, on worries that weak China growth will hit the sector often seen as a play on mainland consumption.

AFFECTED BY CHINA PROPERTY, STOCKS

Some analysts are forecasting a deeper slowdown in the sector, predicting the year-on-year trend could turn negative in the fourth quarter and lead to weaker revenues in 2013.

"To assume that Macau gaming revenues will continue to grow at a double-digit pace, is to assume that the epic pace of property appreciation in China continues," said Mike Turner, analyst at Washington-based brokerage Compass Point.

Macau's boom in the past two years has been due in large part to the assets of many VIP customers in China appreciating sharply.

Those big spenders are also given credit by junket operators based on the value of their property or stocks. So with property prices easing and stock markets weak in China, Turner expects this to be mirrored in gambling revenues.

Other analysts, however, remain upbeat on Macau's future, citing a deeply unpenetrated market that will see further infrastructure development.

And casino owners operating in Macau are undeterred by possible easing of growth.

Billionaire Sheldon Adelson, the chairman of Las Vegas Sands , opened his new $4.4 billion casino on the Cotai strip last month, a reclaimed stretch of land off the Macau island of Taipa.

Rival Wynn Macau, a subsidiary of Wynn Resorts Ltd, said this month it had received approval to develop a 51-acre (20-hectare) plot on the strip.

Sands and Wynn both also have casinos on the main Macau peninsula, along with Macau kingpin Stanley Ho's SJM Holdings .

Other operators who own Macau's 35 casinos include MGM Resorts MGM China, Galaxy Entertainment and Melco Crown .

Macau, located on China's southern tip, has been a goldmine for the six casino players because of surging demand from mainland visitors and high rolling VIPs, eager to place their bets in the only city in the country where its 1.3 billion citizens are legally allowed to gamble in casinos.

Cotai seems to be where the big spenders are headed.

Since the opening of Galaxy's gold-themed palace, Galaxy Macau, in Cotai last year, the visitor flow to the strip has been steadily rising. The opening of Adelson's Cotai Central has cemented a shift away from the main peninsula, say analysts.

Lawrence Ho, chief executive of Melco, a $13 billion company, said the outlook for Macau in 2012 remains solid.

"With the potential for a significant increase in penetration, a supportive infrastructure development pipeline, as well as the economic growth and increasing prosperity of our major feeder market, we believe the future of Macau is well supported."

But investors in gaming stocks may need more convincing if May gambling revenues indicate a lower number than expected.