Gambling at casinos is risky. But even after a 17-month slump, building casinos in Macau still looks like one of the best investments around.
Operators including Sands China Ltd and Galaxy Entertainment Group Ltd have earmarked US$28 billion in spending over the next three years, with new projects that integrate casinos with hotels and entertainment complexes.
The aim is to broaden Macau's appeal beyond hard-core gamblers to families and tourists, and placate a government in China intent on reining in the corruption and graft associated with high-rolling visitors to the city.
While the extra expenditure will slow the return on invested capital, or ROIC, the new projects will hand back an average return of 21% three years after opening, according to brokerage CLSA Ltd.
That compares with about 50% at the peak in Macau two years ago and returns of less than 10% forecast for hotel groups in Hong Kong.
"We think the gaming sector is a good long-term investment as the industry generates high cash returns and the companies have a track record of paying high dividends," said Aaron Fischer, head of consumer and gaming research at CLSA, one of the most experienced analysts who cover the casino industry.
While hoteliers can wait as long as 20 years to get their money back on major investments, the payback on Macau casinos might stretch out to a little over five years, from two years during the 2013-14 peak.
"It's still very short," Mr Fischer said.
The risks remain high for casinos.
China's economy could continue to slow and yuan devaluation could curb tourism as it makes travelling outside the mainland more expensive for price-sensitive lower-tier customers gambling operators are trying to attract,'' said Richard Huang, an analyst at Nomura Holdings Inc.
It would take time to draw enough vacationers to make up for the high rollers the industry has lost, he said.
"Casino resorts have always been high risk, high return," Mr Huang said. "There's no guarantee for casinos. One day you have a lot of customers and the next day you have no customers, like this year."
The average return of some shops in Hong Kong's busiest shopping districts of Causeway Bay and Mongkok is 3% after rents plunged at least 40% from a peak in 2011, according to Raiky Wong, director of the retail department at Centaline Property Agency Ltd.
"Rents are set to drop another 10% next year,'' he said.
Returns on hotels in the former British colony are not much better.
"The average level of ROIC for hotels in Hong Kong for the following few years may remain at single-digit level, even for the best-performing hotel groups, such as Shangri-La Asia Ltd,'' said Zhao Huanyan, a Shanghai-based economist at Huamei Consulting Firm Ltd that specialises in the hotel industry.
Shangri-La Asia's average return was 2.1% from 2010 to 2014, according to data compiled by Bloomberg.
Galaxy Entertainment's StarWorld casino, which opened on Macau's peninsula in 2006, was one of the most profitable projects in the 2013-14 peak of the city's gaming industry, according to CLSA.
Boasting almost 250 tables and more than 240 slot machines, StarWorld had an annual return of 115% in 2013.
That was the highest in Macau's history and more than double the 47% average for existing properties in the former Portuguese colony at the time, CLSA said.
Currently, Melco Crown Entertainment Ltd's Studio City, the $3.2 billion resort that opened last month with a giant Ferris wheel and Batman ride, will probably return 20% of invested capital in 2019, according to the brokerage.
It predicts a 23% return on Wynn Palace, the $4.1 billion resort being built on Macau's Cotai Strip.
The opening of the project, which features a casino, 1,700 hotel rooms, and a lake with gondolas and fountains, will be postponed by three months, until June 25, 2016, because of construction delays, according to Las Vegas-based Wynn Resorts Ltd.
"While the payback on commercial properties may be slower than casinos in Macau, investing in retail and office space does offer some advantages, including greater stability and lower risk because of the recurring incomes provided by long-term rental agreements,'' said Christopher Yip, a property analyst at Standard & Poor's Ratings Services.
"Income and cash flow can be quite volatile for casinos because of their sensitivity to changes in government policies,'' said Lillian Chiou, a credit analyst at S&P.
The spectre of a blanket smoking ban at Macau casinos, travel restrictions, government's limit on gaming tables, as well as crackdowns on gambling promoters and illegal use of debit card machines, have hurt the share prices and earnings of casino operators.
Macau chief executive Fernando Chui said recently that the government forecast an annual revenue of 200 billion patacas for 2016, the lowest level since 2010.
Takings at the city's casinos could fall 32% this year before rebounding with a 10% gain in 2017, according to a Bloomberg survey.
With revenue remaining weak in the short term, Fischer of CLSA said he recommended investors to buy stocks on two out of Macau's six operators and to hold for the rest of the four.
Even after the slump, Macau remains the biggest casino gaming market in Asia and the largest single market globally, with turnover about five times the size of the Las Vegas Strip.
"Returns on invested capital in Macau also remain the highest in the casino world, thanks to the exceptionally high amount spent per customer there,'' CLSA said in a 200-page report on the industry in September.
"Expectations went from overly optimistic to now being much more conservative," said Tim Craighead, a gaming analyst with Bloomberg Intelligence in Hong Kong. "We are still upbeat longer-term on the growing base of middle-class Chinese travelling more, and Macau and its casino resorts are a natural beneficiary."