Macau pawn shop activity: An economic indicator?

As reported in an article this week inBloomberg , pawn shops in Macau are thriving. What, if anything, can investors in the Macau casino space extrapolate from this trend?

[caption align="alignright" caption="Melco's City of Dreams complex in Macau"] [/caption]

While booming pawn shops are rarely positive indicator for a given country's near-term economic prospects, the pawn industry in Macau functions differently than its counterparts elsewhere around the world.

In the former Portuguese enclave, premium mass market gamblers use pawn shops as an unofficial line of credit. Because of capital controls imposed by the Chinese government, Mainland citizens coming to the Macao Special Administrative Region are only allowed to bring in 20,000 RMB, or a little over $3,000. For gamblers looking to spend upwards of 500,000 RMB a trip, this poses a problem.

Since these premium mass market gamblers are not quite enticing enough to obtain lines of credit from casinos and VIP junket operators, these punters are forced to look elsewhere for the extra cash. Enter the pawn shops.

Pawn shops in Macau allow Chinese residents to use debit cards to purchase high-end merchandise such as rolexes, then immediately re-sell the good back to the pawn shop for cash. The pawn shop takes a nominal fee and the gambler has managed to acquire the cash necessary for gambling.

While some may object to a process which is ostensibly money laundering, it's an important source of credit for the fast-growing premium mass market. Strong pawn shop activity is thus indicative of solid mass market gaming performance.

According to Credit Suisse, the mass market segment is growing at a brisk pace and is set to continue to expand over the next year by 25%. Companies with high exposure to mass market gamblers such as Las Vegas Sands ( LVS , quote ) and Melco Crown Entertainment ( MPEL , quote ) stand to benefit.

While the fundamental story driving growth in these stocks remain intact, it may be wise for long-term investors to delay entering a position in these names due to recent performance. Las Vegas Sands is up almost 20% in the past month and Melco has doubled since late July. For the latter, a retracement to its previous highs around the 16 level would represent a better entry point.

Traders can still jump into these names however, as both are in a strong uptrend. For Melco, look for resistance around its all time high just under 22; a breakout above 22 could see Melco move another leg higher, while an inability to move past 22 could see the stock stall.

Disclosure: Author and family are net long LVS and MPEL

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.