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Back on a Tear

Macau’s VIP sector appears to have returned to growth mode, though the mass market will continue to drive industry profitability over the coming year

Thursday, 25 April 2013 12:27
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Macau’s gross gaming revenue in March reached a new all-time monthly record of MOP31.3 billion (US$3.9 billion), up 25.4% year on year and 16.2% higher than the average monthly revenue recorded over January and February.

After the Chinese New Year period (which ran from 10th–17th February this year), Macau daily gaming revenue has averaged out to MOP900 million–1 billion over the past six weeks. “We believe that this could become the new base for the sector,” wrote J.P. Morgan’s Kenneth Fong. “If we assume that the remaining dates of 2013 continue at the same rate of MOP950 million/day (i.e. no acceleration for the rest of the year), 2013 headline revenue growth would come in at 14%, which is already at the high end of consensus estimates.”

Mr Fong believes, therefore, that the earnings risk as far as the Hong Kong-listed Macau casino operators are concerned is “on the upside.” The potential share price catalysts identified by Mr Fong are good results for the first quarter of 2013, strong revenues during the May “Golden Week” holiday period, and easier year-on-year growth comparisons from May onward.

Other analysts were also quick to raise their forecasts for Macau’s gaming industry following the strong March headline number. David Bain at US-based brokerage firm Sterne Agee expects Macau to see six more all-time monthly gross gaming revenue records this year, and his 2013 gross gaming revenue growth forecast is 15%-16%. Union Gaming Research Macau analyst Grant Govertsen forecasts 16% growth, while Wells Fargo analyst Cameron McKnight expects “gaming revenue growth to continue to accelerate through the year on the back of an improving China macro environment, additional infrastructure, hotel and table supply, and easier comparisons.”

Resurgent VIP sector

Mass market table revenue accounted for 26% of total revenue in March and grew 30% year on year, continuing the robust growth it has enjoyed since last year and contributing strongly to industry profitability, given the much higher margins in the mass market relative to VIP. Slot revenue, meanwhile, made up 4% of the total in March and grew 6%.

The main driver of the growth in overall revenue in March was the VIP sector, which comprised 70% of the total and surged 25% year on year, after having posted a modest 3% increase in Q4 2012 and 1% decline in Q3 2012. The robust March VIP performance brought the growth in the sector’s revenue to 10% for Q1 2013.

A caveat, however, is that VIP growth in March was partly the result of a high industry-wide win rate, which stood at 3.38%, higher than the historical average of 3.1% and the 2.98% rate recorded in March 2012. VIP rolling chip volume was up a more modest 10% in March, though that is the strongest growth since April 2012.

This appears to put paid to reports about a crackdown on junkets in mainland China. “Despite the anti-corruption talk and tighter regulation on gifting in China, Macau VIP revenue continues to hold up, signaling strong true underlying demand,” noted RBC Capital Management.

Despite the hype surrounding what looks like the beginning of a return of VIP revenue growth, however, the mass market looks set to continue driving profits over the coming year. Nomura’s Harry Curtis wrote on 18th March: “We met with all but one of the concession holders. All are enjoying strong demand trends in 1Q but look forward to even greater EBITDA growth over the next 30 months as high-margin [mass] demand growth outpaces supply growth by 10-15 points.”

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Bird Flu Concerns

The prices of Macau casino stocks fell near the beginning of April on worries that the H7N9 bird flu could impact visitor flows from mainland China to Macau. Though mindful of the risks, analysts believe the correction is overdone.

Grant Govertsen pointed out: “At the moment all H7N9 cases are contained in the Yangtze River Delta provinces, which are relatively far away from Macau, and we believe it does not yet pose a threat to Macau’s public health and is not having any impact on visitation.”

Kenneth Fong echoed that sentiment, noting: “So far, there is no proof that the disease could be transmitted between humans, a big difference compared with SARS in 2003. Besides, we believe the Chinese government is much better prepared this time around as seen from their fast response and transparent disclosure. While we don’t rule out the possibility for the disease to mutate and spread, as long as the disease is not transmitted between humans, the impact on travelling demand would be rather limited, in our view. Besides, looking back, the negative impact on travel (if any) generally lasts only for a few months.”

Market Shares

The relative market shares of the city’s six casino operators remained largely unchanged from the fourth quarter of 2012 to the first quarter of this year, with much of the difference attributable to luck, particularly in the VIP segment.

Notably, MGM China’s VIP win rate of 2.97% in Q1 2013 lagged the market average of 3.28%, and particularly the rates of 3.56% and 3.55% experienced by Sands China and Wynn Macau, respectively, in the first quarter. SJM’s VIP win rate stood at 3.16% in Q1, while Galaxy’s was 3.38%. Melco Crown had a 3.31% rate at City of Dreams and a 3.04% rate at Altira.

Discounting the luck factor by considering VIP rolling chip turnover by operator, the relative shares of the operators were generally stable between Q4 2012 and Q1 2013. The most apparent trends since the beginning of last year are the steady increases in Sands China’s and Melco Crown’s shares of VIP rolling chip turnover, while capacity-constrained Wynn Macau has seen its share decline.

In the mass market, SJM’s share of revenue continued to fall in the face of significant capacity expansion by Sands China at Sands Cotai Central—the first phase of which opened on 11th April 2012, and the second phase on 20th September—and as Galaxy and Melco Crown continue to ramp up their premium-mass businesses. Sands China finally overtook SJM as the market leader in mass revenues in Q1 2013.

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