While Jason Pidcock, manager of the Newton Asian Income fund, is cautious on China in general, he remains comfortable that his casino holdings are an asset to the portfolio.
Gambling revenues in Macau in 2013 amounted to some $45bn, noted Pidcock. He expects this will continue to grow and could even double over the next five years. There are some question marks over possible governmental interference in the gaming sector, but Pidcock dismissed such concerns.
“To date we haven’t seen any real limitation on casino growth by mainland Chinese authorities,” Pidcock said.
“I think China is going to leave Macau alone because long term they still want to bring Taiwan back into the fold so they do not want to appear to be heavy handed. All the gambling tax revenues actually remain in Macau and do not get siphoned off back to the mainland; the Macau government has become enormously rich, therefore it is unlikely to need further tax revenue from this sector. There are also no signs at this time that China will allow legalised gambling on the mainland anytime soon, so Macau will remain the way to play this theme.”
Within the fund, Pidcock invests directly in the Asian casino companies as opposed to their Western parents, for example buying Sands China as opposed to Las Vegas Sands. Asian subsidiaries of multinationals offer a purer exposure to the region, in his view, but at the same time their Western parents can afford them better management teams, stronger corporate governance and a business model that has been honed over years which he thinks is the “best of both worlds”.
Michael Lai, manager of the GAM Star Asian Equity and GAM Star China Equity funds, is also a big advocate of the Macau gaming sector. He also holds Sands China which has delivered strong performance and is in the top 10 holdings of the China Equity fund. Astonishingly, the casino made more money last year than the whole of Las Vegas.
“This gives an idea of what one company has been able to achieve in Macao,” said Lai.
Lai also owns Galaxy Entertainment, Wynne and Melco Crown Entertainment, a US-listed casino operator in Macao. Macao casino stocks currently account for around 17% of the GAM Star China Equity fund and all continue to perform very well, he added.