Wall Street's Bust Tests `Recession-Proof' Macau: William Pesek

Commentary by William Pesek

Sept. 24 (Bloomberg) -- Taking a break from Macau's teeming card tables one recent evening, four mainland Chinese men sip beer and warily eye two televisions above the bar.

The TVs are tuned to competing business news channels -- one covering the demise of Lehman Brothers Holdings Inc., the other this year's 60 percent plunge in Chinese stocks. Eventually, the gamblers shake their heads and go back across the hall to the Venetian Macau's casino floor.

The juxtaposition aptly brought together some of the world's most gripping economic stories and one of its more intriguing social trends, the latter being the surging popularity of gambling in Asia.

It's getting harder to separate Wall Street's plunge and the meltdown in Chinese stocks. It's also likely that Macau will join Las Vegas in dispelling the conventional wisdom that gambling is a recession-proof business.

A year ago, few quibbled with Macau bulls such as Steve Wynn, Sheldon Adelson and, long before the Vegas tycoons showed up, Stanley Ho. Given Macau's proximity to a nation of 1.3 billion potential gambling enthusiasts, it's still hard to bet against this former Portuguese colony.

Yet some important changes are afoot, including the global economic environment. The U.S. is on the verge of a recession and China is bracing for a marked slowdown in its economy.

Weakening growth is hurting stock markets and also showing that Vegas isn't immune to macroeconomics after all.

Measuring Adelson

One measure: Adelson was the biggest loser in this year's Forbes ranking. The Las Vegas Sands Corp. chief executive officer fell to 15th place from third after casino stocks tumbled. Another: Vegas Strip casino gambling revenue dropped for the seventh straight month in July as cash-strapped U.S. consumers curbed entertainment and travel spending. Revenue declined 15 percent in July alone.

A variable that may change is the flow of mainland Chinese to Macau. Shares of Las Vegas Sands, Wynn Resorts Ltd., MGM Mirage, and Melco Crown Entertainment Ltd. dropped in August on news reports that China may increase travel restrictions to what's now the world's biggest gambling center.

Macau's casino gambling revenue rose 55 percent in the first six months of 2008, accelerating from 47 percent growth in 2007.

Will Macau suffer Lehman's fate -- a place oozing confidence a year ago that has now gone bust? It's doubtful, yet the risks suddenly facing Macau tell a few bigger stories.

Knock-On Effects

One is how the ripple effects of the U.S. credit crisis are traveling far and wide. Another is the hubris with which analysts argued that Asia had decoupled from the U.S. Perhaps the most important is the Asia-wide risk of relying so heavily on China, which is itself a developing nation.

The plunge in Chinese shares speaks to the danger of developing economies depending on another emerging one. Macau relies on so-called VIP gamblers. The drop in stocks may mean fewer high-rollers will come Macau's way.

Macau returned to Chinese rule in 1999, and its torrid early growth is being followed by a slowdown in expansion efforts. One might argue Macau is merely taking a much-needed breather. Its casinos have more than doubled to 30 since the government ended billionaire Ho's 40-year monopoly in 2002 and awarded licenses to five other operators.

When I asked Lawrence Ho, Stanley Ho's son and one of Melco Crown Entertainment Ltd.'s two chairmen, about this recently, he pointed out that the only place in China where casinos are legal still lacks the airport and ferry capacity to support its growth.

Deep Breath

``Macau is just taking a deep breath at the moment -- nothing more,'' Ho says.

Macau's tourism growth may even support another 16 casinos in the next three to four years if the government builds enough transport infrastructure, says Paul Tso, chief executive officer of property developer L'Arc Macau.

``The growth of incoming tourists, gamblers or not, has way outpaced everything the government has implemented,'' says Tso, whose company is developing the 56-storey L'Arc de Triomphe, Macau's tallest casino project, for about $600 million.

Yet the question of whether U.S. casino operators will change Macau, or if the place changes them, hasn't been answered. Walking around the sprawling luxury-shopping centers tacked on to the Venetian Macau and the new Four Seasons complexes, one gets the impression that Vegas is still struggling to influence Macau. The buildings are lonely, sparsely populated places.

Vegas is as much an entertainment destination as a gambling center. Those tapped out at the tables -- or uninterested -- see shows, shop, take in local attractions or dine at any number of top eateries. Many visitors to Macau don't bother getting hotel rooms or eating out, never mind checking out Louis Vuitton, Prada or Gordon Ramsey's menu.

Efforts to change things are certainly brewing. The planned Vegasization of Macau can be seen in the ambitions of Adelson's Las Vegas Sands, with almost a fifth of Macau's casino market. Adelson plans to invest $12 billion in the project.

The odds are in Macau's favor. The effects of a bust on Wall Street make it a riskier bet.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Macau at wpesek@bloomberg.net