Macau benefiting from China VIP recovery

China’s economy is seeing renewed strength in premium activity, driving demand for luxury cars and VIP gaming in Macau, though longer term the outlook for the high roller segment is muted, according to research from Bernstein.

The firm said the strength is being driven by resurgent liquidity growth; improved consumer sentiment; strong property prices and rebounding economic indicators, such as industrial activity. It also noted the government’s anti-corruption campaign appears to be tailing off.

“With Total Social Financing rising as much as 16.4 percent in 2016, and money supply also growing solidly (M1 and M2 growth averaged 22.7 percent and 12.0 percent in 2016), it seems uncontroversial to suggest the abundance of money in China has contributed to resurgent consumer confidence, and high-end discretionary spending,” the report said.

“Improving housing prices are in part a product of the boom in liquidity, but likely also help to reinforce high-end demand – given the feedback loop of wealth effects.”

The firm said it expects this strength in high-end consumption to continue through the summer if not for longer, as the government is unlikely to want to abruptly choke off liquidity growth ahead of the party congress.

Macau already appears to have benefited from unexpectedly strong growth in VIP in February this year. Overall gross gaming revenue rose 17.8 percent over the month, far exceeding expectations.

Sterne Agee notes that operators have not suggested an abnormally strong Chinese New Year and strength continued through to the end of the month, despite the mass traffic from the mainland falling off. This points to the upside coming from higher bet sizes from VIP, it notes.

Bernstein said the uptick in VIP is likely to benefit Wynn Macau, Galaxy Entertainment, and Melco Crown Entertainment the most, at least through the first half of this year.

Melco began VIP operations at its Hollywood-themed Studio City property in November last year, which helped to double revenue to  $246.2 million in the fourth quarter compared to $123.2 million a year earlier.

Despite the current strength, Bernstein said its longer-term view on the VIP sector in Macau is for a more moderate 3 percent growth through to the end of the decade.

On the first day of this year’s session of National People’s Congress on March  5, Premier Li Keqiang announced a set of economic and financial targets for 2017, including real GDP growth of around 6.5 percent and consumer price inflation of 3 percent.