Gambling: A State of the World Report
The press regularly reminds us that we live in a work teeming with dangerous addictions. They include: drinking, drugs, sex, and gambling. The reality is that most people enjoy these activities and incorporate them into their lives without becoming addicted. In this piece, I examine what is happening in gambling by region and type with an industry expert. Warwick Bartlett is the Chief Executive of the Global Betting and Gaming Consultancy (GBGC). GBGC is one of the largest and most credible specialists on gambling in the world. The company has worked with or supplied information from its database to over 500 clients.
We start with some historical data and discuss how things have changed.
Gambling by Region
Elliott: It appears there is more gambling in Asia, North America and Europe than in other regions. And while gambling continues to grow rapidly in Asia and North America, it has leveled off in Europe. Among the other regions, Africa is growing most rapidly.
Table 1. Gambling by Region, Gross Gambling Yield (GGY)*
*Amount Bet Less Amount Paid Out to Players as Winnings
Gambling by Method
Elliott: After dipping slightly in 2009 as a result of the global meltdown, gambling has continued its upward climb. Internet gambling did not dip in 2009 and continues to grow at a rapid rate. The large reduction in gaming machines revenues is somewhat surprising.
Warwick: The gross gambling yield of machines did fall 15.5% overall. When looking by continents: Asia recorded the largest fall (-45%), followed by Oceania (-2%). Europe and North America recorded 4% and 9% growth respectively. South Africa recorded the largest growth of 84%, but it is the smallest market observed.
Elliott: But it does appear That Americans and Europeans prefer gaming machines while a larger portion of Asians prefer table games.
Table 2. Gambling by Method, (GGY)
Gambling by Country
Elliott: Consider next gambling by country. Overall, the US dwarfs all other countries with more than $100 billion bet per year. The closest country to the US is Japan with about $34 billion. It is not surprising that on a per capita basis, Macau is by far the largest. Singapore and Australia, also both “destination” countries for gambling but follow way behind Macau.
Elliott: Table 3 provides data on the largest casinos in the world. Looking at the gaming machines and card/table games shares, it is notable that of the US casinos on the list, 94% are machines versus only 67% in Macau. Among these casinos, Galaxy has the largest betting gross.
Table 3. – The Largest Casinos
Elliott: Will opening of Hong Kong-Zhuhai-Macau Bridge impact Macau gambling revenues in a significant manner?
Warwick: I believe it will but there are those operators in Macau who believe that the main benefit will come through increased Meetings, Incentives, Conferences, and Events (MICE) usage. The entry point from Hong Kong is close to the Hong Kong Airport so delegates will be able to fly in and take a taxi to Macau. At the moment you have to take the fast boat but getting on and off with heavy cases is no easy task. Presently Hong Kong is still the best place for MICE but Macau should take market share once the bridge is open. Ease of transport in my view is definitely a boost to commercial activity. We have to remember that Macau is still developing as a resort. Although its figures are impressive, it is not yet a mature leisure destination. And more attractions will create new reasons for families to go to Macau. Beijing has stated that it wants Macau to broaden its offerings; Macau now has 19 Michelin starred restaurants. London has about 32.
Elliott: I understand your point about MICE travelers. This will also happen with the new Wynn casino near Boston. From the airport, there is a subway new to the casino. There is also a subway into downtown Boston from the casino.
Question: What are the prospects for a growing demand for Macau from the cities west of the enclave such as Wuzhou?
Warwick: Wuzhou has a population of 3.2 million. And if given visas, I am sure they will want to visit Macau.
Elliott: Gambling in the New England/New York region of the US: is there a demand for more casinos? There are already two large casinos in Connecticut: Mohegan Sun and Foxwoods. Since 2011, the betting handle of each has fallen significantly: Mohegan Sun is down 17%, Foxwoods is down 24%. The new Wynn casino just outside of Boston will have 3,000 machines, 150 gaming tables, and 600 rooms. The new MGM casino in Springfield will have 3000 machines, 75 gaming tables, and 250 rooms. The Wynn casino will be only 105 miles from the Connecticut casinos while the MGM casino will be only 73 miles away. It will be very interesting to see whether the demand for these four casinos is there. I believe the new casinos will draw heavily from the older Connecticut casinos.
Warwick: If you look at countries with more that 5 million people (Table 4) you see that gambling per capita in the US is quite low. It should be higher than Canada but restricted supply keeps the numbers down. As a consequence, I believe there are opportunities to expand the market and create a higher tax yield.
Table 4. – Gambling in Large Countries, 2016
Elliott: You might be right. But I predict that the new casinos will draw significant numbers from the older casinos so that the handles of both Foxwoods and Mohegan Sun will continue to decline.
I have heard we are turning gambling casinos into “Disneylands with discount stores”. Is this a global phenomenon?
Warwick: The US has led the world in integrated resort development due to reasonable taxation in Nevada, leading to a highly competitive market that creates innovation. In the early days Vegas survived on the pent up demand for gambling because few states offered gambling other than horse racing. That is not the case now. The casinos have recognized that their customers require more than just gambling for entertainment. So people need, good restaurants, shopping, shows, and events.
Elliott: I view what is happening somewhat differently. The US casinos are moving into “integrated resort development” because the demand for the sort of gambling they offer is not there. It is a desperation play. Foxwoods has put in a discount store mall in hopes of avoiding bankruptcy.
Elliott: What are the most significant impacts of growing Internet gambling, and how will it impact other gambling forms?
Warwick The strength of Vegas is that it moves with the times. The entertainment offering in the major US cities has grown this last 20 years and the new target market the Millennials are not so bothered about gambling so you have to offer what they want.
Warwick: The most important factor is assessing whether to invest in gambling stocks is government intervention either through regulation or taxation. Some say that applies to all businesses. True. But the difference is that governments do not really like their citizens to gamble so they do not see gambling enterprises being for the common good. So they can and do introduce punitive legislation without fear of political loss.
Elliott: Table 5 provides data on gambling investment opportunities. I have highlighted in red what concerns me. Payout ratios in excess of 100% are not sustainable. I am also troubled by companies that are losing money. On top of that, as reported above, the sales of gaming machines are down. What do you see as attractive?
Warwick: You make a good point about payout ratios, and add to that some of the companies are carrying a lot of debt. For LVS, Sheldon Adelson and his wife Miriam own about 20% of the stock, and in 2008, Adelson rescued the company from bankruptcy with his own money, so I have less fear than most about the LVS dividend payout ratio.
The operators of integrated resorts, because of their huge investment are able to work with governments to settle on tax rates and certain conditions that will make the enterprise a success. Even so, who would have thought the implementation of the smoking ban in Macau along with visa restrictions, and a clamp down on graft would have affected Macau how it has? As a consequence, we see the Macau stocks down 13% over the last three years.
Table 5. – Gambling Companies
Warwick: Let’s look at the Internet gambling companies and their stock price growth over the last three years – Playtech +54%, NetEnt +38%, 888 Holdings +33%. The reasons are the convenience of Internet gambling and the value offered:
- Increased connectivity via mobile.
- Off shore low tax locations.
- Discretion, no one need see you gamble.
Going forward governments are wising up that they have lost control of gambling. In Europe states are legislating on a state by state basis. Operators must license in a jurisdiction and pay the tax. Regulation is costly and time consuming and the penalties for misdemeanors are high. And there is great concern over addictive players and who should pay for treatment. In the UK, the Remote Gaming Association has been tasked by the Gambling Commission to produce data base software enabling a gambler to close their accounts permanently. And beyond that make it that the addictive gambler cannot go online.
Table 5 shows that most of the growth in gambling stocks over the last three years has been in igaming stocks. The most efficient major operators are reporting double digit growth. This has been achieved through convenience and outstanding value to the gambler. Certainly the best in my lifetime. Convenience in the UK has come about through mobile gambling where smart phones have enabled the gambler to bet in play during soccer matches from their armchair. Indeed, in play now represents over 60% of Internet gambling in sports. The last time I made recommendations, I suggested LVS and Playtech. The founder of Playtech, Teddy Sagi is slowly divesting himself in Playtech shares.
Regarding casinos, the big play going forward is Japan and the move to have four integrated resort casinos. The two largest resorts will probably make $2 billion in profit before tax. Using LVS as an example, on the 2016 returns that would equate to a 100% uptick in pre-tax profits.
Every operator worth his salt is pitching for Japan. And it would be easy to go for LVS on the basis of what they have done elsewhere. But in the gambling industry, you just never know, so it might be safer to go for VanEck Vectors Gaming ETF (BJK). Thirty eight percent of its top ten holdings are in casino stocks. Year to date they are up 20% so a lot of the speculation into Japan may already be in the price.
Elliott: I can see why you like Playtech (PTEC.LN). Its numbers are in order and it appears to be a well managed firm. I am surprised you have not recommended Genting Malaysia Berhad (GENS SP). Their numbers look good and they appear to have a unique market without competitors. Do you think they will bid on the Japanese concessions?
Warwick: Genting Malaysia Berhad surprised everyone when they won one of the two licenses awarded in Singapore. They have decided to pull out of South Korea so as to concentrate on Japan, so that answers your question. They operate throughout the UK and have Resorts World casino New York. They do not carry too much debt and would certainly be a contender in Japan. The stock price is up 36% this year already.
But your question confirms the point that with so many good companies pitching for Japan, investors should consider the Van Eck Vectors Gaming ETF (BJK US). The ETF will reduce losses for companies that pitch for Japan and do not win licenses.
Elliott: I agree that the Van Eck ETF allows one to “hedge one’s bets.” All but four of the companies listed in Table 5 are held by the ETF.
People enjoy gambling, and overall, it is a growth industry. But patterns are changing. An increasing share will be conducted online. And casinos, recognizing their markets will much larger if they appeal to all family members, are evolving into integrated resort developments.