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China, today

Notes from the road: On highways, high-rollers and handsome returns

17 Juli 2019
Autor: Varun LaijawallaAssistant Portfolio Manager, 4Factor
  • I travelled to Hong Kong for an investment conference and followed that up with company visits in Macau to get a closer read on its gaming sector.
  • Macau, known as the ‘Vegas of China’, is a tiny island city that sits just across Hong Kong Harbour from its more famous sister city.
  • A new high-speed railway whisks gamblers from Shenzhen and Guangzhou to Hong Kong and on to Macau.
  • Macau’s casinos attract China’s burgeoning middle class as well as the very affluent.
  • The casinos tap into the consumption trend which is driving the shift in China’s economy.

Varun Laijawalla's signature
Varun Laijawalla,
Assistant Portfolio Manager, 4Factor

“The safest way to double your money is to fold it over once and put it in your pocket”
– American journalist, Kin Hubbard.

In 1989, an unknown Welshman walked into his local betting shop and wagered £30 on an ‘accumulator bet’ that a number of events would transpire before the year 2000:

  • Singer Cliff Richard being knighted (4 to 1).
  • Irish pop band U2 remaining as a group (3 to 1).
  • English soap opera EastEnders still being aired on BBC (5 to 1).
  • Australian drama Neighbours still being shown on British TV (5 to 1).
  • Australian soap opera Home and Away still being an active TV show (8 to 1).

He collected a whopping £194,400 in winnings, marking a 647,900% return, in what is regarded as the largest novelty bet ever won.

Despite this, I’m not convinced that even this lucky Welshman could have predicted that a diminutive nine-square mile, Portuguese-speaking, egg-tart obsessed special administrative region1 would become the world’s biggest casino hub, six times larger than Las Vegas.

Macau’s gambling revolution

Macau sits on the south coast of China, a stone’s throw from Hong Kong and Zhuhai. After 442 years of Portuguese rule, Macau reverted to Chinese control in 1999. The blend of cultures is as conspicuous as it is fascinating. Visitors are immediately struck by the interspersing of temples and churches along cobbled streets. Tourists snack on pork buns and egg tarts with equal fervour.

Macau’s relationship with casinos stretches back to 1849, when the Portuguese legalised gambling. When the handover occurred, Sociedade de Turismo e Diversões de Macau (STDM) – the monopoly operator set up by tycoon Stanley Ho – controlled gambling in the colony.

The most significant development took place in 2002, when the authorities decided that Macau, as a special administrative region, would be the hub to provide gaming for Chinese nationals, as gambling is prohibited in mainland China. This paved the way for additional gaming licenses, which were snapped up by Las Vegas Sands, MGM, Wynn, Galaxy, Melco and STDM-owned SJM.

So began Macau’s gambling revolution.

What happens in Vegas stays in Vegas

Las Vegas provides a useful yardstick for how Macau’s gaming industry could develop. However, the inherent differences between the markets are more striking than their similarities.

First is the market size. In 2006, Macau’s gross gaming revenue (GGR) overtook that of Las Vegas. Macau’s growth versus Las Vegas’ maturity is underscored by the 8-year historical GGR compound annual growth rates (CAGR) of 6% and 1.7%2, respectively.

Second, Las Vegas’ GGR entirely consists of ‘mass market’ revenue from gamblers who exchange cash for chips to play. In Macau, on the other hand, GGR is about evenly split between mass market and VIP players who make use of credit lines offered to them by promotors (called ‘VIP junkets’) to play. Staggeringly, only 150,000 unique patrons generated Macau’s US$18 billion in VIP GGR in 2018.

This translates into a whopping US$120,000 that each patron loses annually, more than twice the US median household income.

This phenomenon is linked to the third major difference, which is that gaming generates 90% of Macau’s total revenue, compared to 10% from hotel, retail and food & beverage. In contrast, non-gaming sources make up 67% of casino revenue in Vegas. While this is partially due to Macau’s place in its lifecycle, a lot of it is down to the nature of Chinese gamblers, who tend to be more hardcore in nature. This is also illustrated by the minimum bet sizes, which are ~US$100 in Macau versus ~US$5 in Las Vegas.

Macau: VIP gambling by numbers

Gross Gaming Revenue   $6bn $38bn
Market size Mass GGR $6bn $20bn
  VIP GGR $0bn $18bn
  # of annual visitors 60 million 34 million
Mix Gaming revenue (% of total revenue) 33% 90%
  Non-gaming revenue (% of total revenue) 67% 10%
Capacity # of hotel rooms 150,000 39,000
  Average occupancy rates of hotel rooms 88% 95%

Sources: UNLV Centre for Gaming Research, Alliance Bernstein, company annual reports, January 2019

Build it and they will come

Breaking down the demand/supply equations can explain the ebbs and flows of Macau’s gross gaming revenue trends. Demand is a function of visits multiplied by spend. Supply is a function of tables and hotel rooms.

China’s anti-corruption campaign in 2014 weighed on demand in 2014 and 2015, resulting in 3% and 34% declines in GGR, respectively. This hit the VIP segment particularly hard. However, as the number of investigations into senior officials has tailed off, demand appears to be picking up.

My meeting with Sun City revealed a related change in behaviour of junkets. Sun City is Macau’s largest junket operator with a 45% market share. During the hubristic highs of 2013, junkets typically offered an 80/20 credit/cash split, i.e. a cash deposit one-fourth the value of the credit line.

This resulted in painful losses for the junkets during 2014-15, sending some of the smaller junkets out of business. Lending norms have evolved to a more conservative 45/55 level today, and Sun City expects the cash component to continue to rise. This suggests an improvement in the sustainability and quality of Macau’s VIP GGR post-2015.

Macau GGR

Source: Alliance Bernstein, April 2019

From a policy standpoint, the Chinese government has encouraged the development of transportation infrastructure to facilitate the growth of Chinese visitors to Macau.

Improvements to the transport system has made it easier to visit Macau.

The first of two major projects delivered in late 2018 was the China High-Speed Railway to Hong Kong, which materially shortened travel times from Shenzhen and Guangzhou. The second was the Hong Kong–Zhuhai–Macau Highway Bridge, which, compared to the ferry is both cheaper (HK$50 vs HK$200) and faster.

Projects expected to complete in 2019 and 2020 include the Macau Light Rail Transit network, improving accessibility to casinos within the Cotai catchment area, and the rail extension to neighbouring Hengqin island.

In 2012 the authorities set the number of new live dealer gaming tables to a maximum growth rate of 3%. It’s a misconception that this cap is creating a supply bottleneck. In reality, casino operators have used minimum bet sizes to control play volume. This works as an effective tool as visitors have taken larger table minimums in their stride. The real bottleneck is the number of hotel rooms, which currently stands at 39,000 vs average occupancy levels of around 95%.

The real bottleneck is the number of hotel rooms, which currently stands at 39,000 vs average occupancy levels of around 95%.

The casino operators expect 3-5% annual increases in hotel rooms over the next five years, with the likes of SJM and Galaxy on track to open an additional 3,400 rooms collectively over the next 18 months. This could help to soak up unmet demand, particularly in the VIP segment where availability of rooms is a big swing factor in deciding where to gamble.

2022 and beyond

In 2022, the gaming licences for all six casino operators will expire. This was a key discussion topic in all my meetings in Macau. The current agreement stipulates that operators must pay 40% of gaming revenues to the Macau government. Gaming taxes account for almost 80% of Macau’s total tax base.

Gaming taxes account for almost 80% of Macau’s total tax base.

All the casino operators I met with agreed that:

  1. All existing operators would have their licenses renewed, not least because of the quirk that gaming concessions and land concessions are separate.
  2. It is unlikely that any new licenses will be issued.
  3. Operators will need to invest in building non-gaming facilities in Greater Macau.

Looking further ahead, Japan presents both an opportunity and a threat to Macau. In 2018, the Japanese government passed a law allowing casino gambling at integrated resorts. The first license has been issued to Osaka, with an additional two licenses still up for grabs. While the first casino is only expected to open in 2025, it is estimated that once all three licenses and casinos are up and running, Japan would represent a U$15bn market, making it the second largest in the world.

Unsurprisingly, most of the operators I met with including Las Vegas Sands, MGM, Melco and Galaxy are doing the ground work and partnering up with local Japanese firms. It will be interesting to see how this develops.

Tapping into the China consumption trend

The investment opportunity in the Macau gaming sector is unusual in that it taps both the growing middle-class in China – which consists of 300 million people – as well as the highly affluent segment. China, despite being home to the second largest population of millionaires globally, is expected to be the sixth fastest-growing high net-worth country over the next five years4.

Crucially, this broad phenomenon is driving a shift in China’s economy from an investment and export-led model to a consumption and services-driven model.


All investments carry the risk of capital loss and past performance is not a reliable indicator of future results. Emerging market: Some countries may have less developed legal, political, economic and/or other systems. These markets carry a higher risk of financial loss than those in countries generally regarded as being more developed.


1 Feeling adventurous? Recipes for quintessential Macanese dishes, including the iconic egg tart, here:

2 Sources: UNLV Centre for Gaming Research, Alliance Bernstein,company annual reports, January 2019

3 The difference between the net wins (the amount guests bet less the amount they win) and the tax an establishment pays on gaming supplies.

4 A study conducted by data provider Wealth-X suggested that the 10 fastest growing HNW countries between 2019-2023 will be Nigeria, Egypt, Bangladesh, Vietnam, Poland, China, Kenya, India, Philippines, and Ukraine ( More tangibly, China minted two new billionaires every week in 2018.

Varun Laijawalla
Varun Laijawalla Assistant Portfolio Manager, 4Factor

Important information

All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This is not a buy, sell or hold recommendation for any particular security. Portfolio holdings may change significantly over a short period of time. Any decision to invest in strategies described herein should be made after reviewing the offering document and conducting such investigation as an investor deems necessary and consulting its own legal, accounting and tax advisors in order to make an independent determination of suitability and consequences of such an investment. This material does not purport to be a complete summary of all the risks associated with this Strategy. A description of risks associated with this Strategy can be found in the offering or other disclosure document for the Strategy. Investec does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.

Issued by Investec Asset Management, July 2019.

The content of this page is intended for investment professionals only and should not be relied upon by anyone else

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