Asia round-up special: Jason Ader predicts Macau bounce back in 2024

SpringOwl Asset Management CEO Jason Ader has spoken exclusively to Gambling Insider, offering insight into Macau’s current economic climate, and when he expects the region to make a full recovery from Covid-19-related issues.  

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Hi Jason. So, we’re talking today about Macau and its economic results from February.  The region is still trying to break free from its economic & logistical issues surrounding Covid-19.  

What do you make of revenue results in February... they were up, but were they positive?  

"I think when all Covid policies are lifted in Macau, and there is open travel again, Macau will actually exceed its best year ever; period. There’s just so much pent-up demand" Jason Ader, SpringOwl Asset Management CEO

I don’t think they were particularly positive. Business in Macau is way down from its peak. Last year in 2021, Las Vegas had an absolute record year without any business travel. I think when all Covid policies are lifted in Macau, and there is open travel again, Macau will actually exceed its best year ever; period. There’s just so much pent-up demand.

However, I don’t think that’s going to be this year or next year most likely; but it’s very likely to be anytime from 2024 onwards. The bottom line, in my view, is there will be peak revenues in Macau once Covid policies are lifted and there’s free movement of people back to Macau. 

That being said, there’s a new issue to talk about. I think it’s an overriding issue to all your questions. And that’s the potential for war in Taiwan. There are reports that China is very closely watching what is going on with Russia in Ukraine. So, the potential implications for Taiwan are really weighing on Asian companies. Any geopolitical instability in the region is obviously bad. In fact, bad to catastrophic; for both valuations and business demand in Macau and the Philippines.

I think most people would agree that it’s not going great right now for Russia, which is becoming very isolated. Nobody, including the US and the UK, is buying oil, businesses are closing operations in the country. I don’t think China wants to be isolated in the same way that Russia is. I don’t think they’d want to become a Pariah state. So, I’m hopeful a potential conflict between China and Taiwan isn’t on the cards. But people are talking about it and people are writing about it. It’s a new issue that is surrounding China, which ultimately has an effect on Macau’s stock.  

Given these uncertainties, how hard is it to predict a timeline of recovery? You believe 2024 will be the year Macau experiences a boom, but how hard is it to predict this with certainty, given the volatility and unpredictability of the current geopolitical landscape?   

It’s definitely hard to predict. But it’s a directional prediction. There are over a million people very close to Macau who, legally, love gambling. There are not enough gaming positions in Macau for all the demand that exists. That’s why it's such an extraordinary market; people just can’t access it at the moment. The 2018 & 2019 revenue numbers were particularly noteworthy. There’s way more demand to gamble in Asia than can be supplied by Macau and other legal jurisdictions. It just depends on travel restrictions at the moment. If you look at Vegas, I’m pretty sure the Venetian and the Palazzo were over 30% better than both their peak years. And, regarding Vegas, there have been no business meetings, no conventions, no travel; just built-up demand. 

Also, I would point out that China is not raising interest rates as the rest of the world are. They’re actually lowering interest rates because of the real estate crisis that’s existed among developers, who are now struggling with liquidity. If China eases liquidity, you’re left with pent-up demand and a population that loves the Macau product. So, I do believe Macau will reach its all-time highs, but it’s not going to be this year or next year; but I do think there is some chance we’ll get there following 2024. Even if we don’t experience a Macau boom until 2025, 2026, the current stock prices really don’t reflect the upside potential of Macau, especially if it ends up following Vegas in post-pandemic success.  

There’s been a crackdown on satellite casinos and junkets from Macau’s Government; it looks like it's headed down a road of regulation. If it continues down this road, do you think it will be detrimental to Macau’s attractiveness?   

It’s very clear that the junket business is over. Las Vegas Sands was out of the junket business years ago. I think concerns over the junket crackdowns are overblown, in the context of true demand. The way I view it, demand is demand. If demand doesn’t come to Macau via junkets, it’s bound to come direct, or some other derivative of direct play. But it won’t be junkets. The desire to gamble has not changed. The desire to experience Macau’s ever-improving product – with casinos, hotels, restaurants – that’s not going to change.

The junkets facilitated business, but they didn’t create demand. Demand is what it is. So, junkets won’t be back, which I personally think is a good thing. I think a clean, regulated market is undoubtedly a better market, and the junkets’ pay relationship with the China Union was never something that made a whole lot of sense to me. I fully support the position of the Chinese Government on this, and in the end, the licensed and regulated operators like Melco and SJM will all do better as a result.    

The Second Standing Committee has recently extended licensing, initially due to expire in June, to the end of 2022; giving more time for the casino rebidding process. Do you think this was an inevitability given the economic, Covid-19 situations in Macau? What’s your take on this?  

I don’t think it was a material surprise, the extension was largely expected. The timing is clearly related to Covid. I think the biggest win for operators is there were no new taxes. The duration of the licences was an attractive duration, particularly following a period of public feedback. There was some potential risk that the licensing would be shorter than 10 years. But I think the 10-year licensing that’s been granted is very good; it’s very investable from a western market’s perspective. Also, the tax rate is constant, there are no new licensing or franchise fees. Those are more business-friendly regulations than those in place in the US right now to drill for oil.

It’s far harder and more complicated to be an oil company than to operate and continue to operate a casino in Macau. So, what I think Macau is not really getting credit for is the fact that even though there was uncertainty around the licences, they were, in the end, all renewed for 10 years, without a material fee for renewal, and without a material increase in taxes. So, it’s great news for the companies that are there. They’re getting loyalty from the Macau Government that I don’t think is being appreciated enough. Loyalty to the companies that have invested billions of dollars there. 

Obviously, you’re predicting a big boom anytime from 2024. But what do you think the rest of 2022 holds for the Macau market?  

It will be slow progress. There are still a lot of constraints and uncertainty. This is not the year for a recovery in Macau. With the greatest respect to the vaccines, which work, they’re just not widely distributed yet in China to the point where things are reopening fast enough. The case is the same for antivirals, which are only being rolled out in certain states at certain rates per day. I mean, we’re in the middle of March, and I hate to say that it will be a write-off year, but 2022 is not going to be the year that matters. Next year, or, more likely 2024, is going to be the year that matters for Macau.  

If you look at Singapore, it looks like things are trending back towards — not historic highs — but something that you could say is “more normal.” For Las Vegas Sands, who sold its property in Vegas to strengthen its balance sheet — Singapore is now a profitable market for them to enter. The company can afford to have a slower recovery in Macau with steady incomes in Singapore. Because when Macau opens it’s going to be dynamite. There’s going to be an explosion of demand; there really hasn’t been a whole lot of new supply in the market, it will purely be pent-up demand.  

"I don’t think China wants to be isolated in the same way that Russia is. I don’t think they’d want to become a Pariah state. So, I’m hopeful a potential conflict between China and Taiwan isn’t on the cards"Jason Ader, Springowl Asset Management CEO

So, you’re fully confident we’ll see a boom in Macau by 2024?  

The way I see it is, using the US as an example, in the US you have to hold the stock for one year and a day to have a lower tax rate. So, now, in Macau, it’s the perfect time to buy-in, prices are low and you have to wait a year anyway to get low taxes. So, by the time we get to 2023, all of the casino games won’t be at a short-term gains rate, but a long-term gains cap rate.  

But I think Macau’s growth is really going to surprise people when Visa restrictions are lifted. Because we’ve seen this in the Philippines. Despite the fact that borders have opened there, the domestic play has been extraordinary. Bloomberry’s numbers are out and they were really strong. I would point out to people looking to invest in Macau to have a look at Bloomberry and its publishing numbers, which support my thesis that, in my view, the Asian gambling industry is going to recover just fine. Las Vegas has recovered, and there’s a chance Macau’s recovery could be even better given the population in local areas. 

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