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Rocky Road Ahead

Even optimistic Macau gaming analysts don’t expect recovery until next year

Monday, 22 June 2015 17:07
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Not long ago, the only thing analysts covering Macau gaming disagreed about was how fast it would grow and which operators would benefit most. Analysts speaking at this year’s Global Gaming Expo Asia (G2E Asia), against a backdrop of 11 consecutive months of declining casino revenue as new resorts begin to come on line, disagreed on a host of issues, including whether gaming revenue or stocks have found a bottom, the timing and shape of any possible recovery, the impact of additional market supply into the teeth of this downturn and much more.

After gross gaming revenue hit a record high of 38 billion patacas (US$4.75 billion) in February last year, it slowed to a trickle during the next three months and began to decline in June. President Xi Jinping’s anti-corruption campaign in mainland China is widely seen as the principal reason for the decline.

Last year, gross gaming revenue declined by 2.6%—the first ever annual fall since the liberalization of the industry in 2002.  

It fell a further 37.1% in the first four months of this year. Reasons for the ongoing decline include transit visa restrictions, China’s slowing economic growth and declining housing prices, junket promoter liquidity issues, protests in Hong Kong on top of growing antimainland visitor sentiment in a destination many Chinese travelers visit in tandem with Macau, greater regulatory scrutiny and a mass gaming floor smoking ban instituted in October.

“What a difference a year makes,” Bloomberg Intelligence Senior Gaming Analyst Tim Craighead says. He notes earnings estimates for the six Macau operators—Sands China, SJM Holdings, Galaxy Entertainment Group, Melco Crown Entertainment, Wynn Macau and MGM China Holdings—are down 37% and stocks have “roundtripped” since 2013. Mass market growth, the main driver of revenue expansion for the previous two-plus years, has “hit a wall,” retail sales are faltering and labor costs are rising.


“In six months, hopefully we’ll be rocking along the bottom. Part of that is on a little bit of stability we’re seeing now, specifically with VIP,” Mr Craighead, who also serves as Bloomberg Intelligence’s director of Asian research, says. “The central issue is: do we see the mass market ready to respond to new resorts?”

The full smoking ban proposed by the Macau government represents a “wild card” that could impact both mass market and VIP, by changing duration of play for smokers, he adds.

“We see a case for resumed growth in 2016, coming off a low base,” Mr Craighead says, on the back of China’s economy structurally shifting toward consumer spending. “Macau is a bet on the China consumer growth story.”

“Macau is a pure play on Chinese outbound tourism,” CLSA Regional Head of Consumer Research Aaron Fischer says. He expects the growth rate of mainland visitor arrivals to Macau to slow from last year’s 14% to 9% over the next five years, but that will still mean an increase to 38 million by 2020.

“I’m quite optimistic about Macau,” Mr Fischer says. “There’s huge investment, $40 billion cap ex [capital expenditures], $20 billion in a short time. The Philippines is becoming more credible but has maybe $8 billion cap ex.” In the short run, though, “We forecast Macau revenue down 26% this year,” he says. “We’re not seeing infrastructure fast enough for mass players to replace VIPs.” 

Mr Fischer sees new resorts promoting expansion next year. “I hope new projects are interesting enough to drive mass-market growth.” 

“I’m struggling to see why mass market will revive,” Morgan Stanley Asia Gaming Research Head Praveen Choudhary says. Except for Melco Crown’s Studio City, now expected to open late this year, he doesn’t believe that new resorts will have enough attractions to drive market growth. Hotel occupancy and per capita tourist spending are also down, as more group travelers come to Macau, he adds.


Following Mr Choudhary’s G2E Asia panel appearance, Morgan Stanley issued a report under his name along with analysts Alex Poon and Thomas Allen warning that “investors are not cautious enough” about Macau stocks. The report cites falling demand, slowing earnings, potential valuation de-ratings and regulatory issues, including a potential visitor cap, a full smoking ban and new conditions on gaming licenses that expire in 2020 and 2022. Credit Suisse analysts Kenneth Fong, who attended G2E Asia but was not a panelist, and Isis Wong, issued a similar warning during the same week. “After all, the sector is not attractive at 23x P/E with risk for further earnings cut,” they wrote, citing continuing weakening of average daily gaming revenue.

Mainland authorities are “not out to get Macau,” Mr Choudhary says, citing helpful initiatives such as expansion of border gate facilities and hours, rail links bringing visitors to Macau’s doorstep and joint development of Hengqin island, a couple hundred meters across the river from Cotai. Stricter transit visa enforcement is “a loophole that was closed,” while the anti-corruption crackdown and smoking ban have been “a long time coming,” he says.

“China is a father, Macau is a son. China cares a lot about Macau,” Mr Choudhary says. “The son is addicted to Chinese visitors and gambling, and that’s not good. Let’s not rely on Chinese tourism and gaming revenue [China says]. I’m not sure that all the companies get it. Having hotel rooms and a retail mall is not necessarily enough to drive people to come here.”

“I don’t think we’re done in the VIP business [declines] either,” Mr Choudhary, who serves as a Morgan Stanley managing director, believes. “Liquidity comes down due to longer payback time [by players to junket promoters]. If payback goes to 30 days from 15 days, VIP liquidity has halved.” Junket consolidation means the top five junkets have gone from 50% to 80% of the market, with the largest, Suncity Group, going from 20% to 30%, but he doesn’t see that helping the situation. “I’m not sure bigger junkets have any advantages,’ he says. “At some point, mass will become 70-to-80% of gaming revenue.”

“The fear factor within China is here to stay,” Sanford C Bernstein (Hong Kong) Global Gaming Senior Analyst Vitaly Umansky says. “But at some point it becomes the norm, and people will come back to gaming. Whether they come back to Macau is another question.” He contends, “The challenge is bringing product to the market people want.”


“Studio City could drive incremental demand. It’s a potential game changer” Mr Umansky, who once worked for the property’s minority owner New Cotai, says. “That’s the most valuable piece of land in Macau,” adjacent to the Lotus Bridge border crossing to Hengqin island and a stop on Macau’s light rail line. Studio City will include a figure-eight Ferris wheel built into the art deco structure, a family entertainment area with Warner Brothers and DC Comics themes featuring the Batman Dark Knight Flight ride, plus a television studio, 5,000-seat arena and The House of Magic, featuring traditional masters of illusion and prestidigitation, plus multimedia technologies in three different settings.

Mr Umansky believes Sands China’s Parisian and Wynn Cotai, both scheduled to open in the first half of next year, could also be demand drivers. “My base case is fundamentals bottoming late this year. Mass picks up early next year,” he says.

The only investment banking analysts based in Macau, Union Gaming Research Macau, upgraded the city’s gaming sector to buy in January. “Clearly the turnaround has not happened yet,” Managing Partner Grant Govertsen says. “We seem to have stabilized at his new low of MOP19-20 billion [monthly gaming revenue].

“There’s risk to both the downside and upside from here,” he says. “In a political context, I’m not sure there’s any more pain that can be presented. I don’t think things can get worse by mainland policy. A full smoking ban represents the biggest regulatory risk.”

Elaborating on upside risk, Mr Govertsen says there have been three major legs down for VIP revenue, May-June last year, September-October and February. “Whoever feels they’re at risk has selected themselves out of the market,” he explains. 

“Has the VIP market permanently changed? Probably. The first leg down presumably is lost permanently. The second and third group probably represent people who have nothing at risk in terms of corruption but are fearful in this environment. Those groups will probably come back once some kind of comfort level is found,” Mr Govertsen says. “That could happen as quickly as they left. If you’ve got a sell rating on the stock, you’re not going to see that coming. It could happen next week, it could happen a year from now.”

Mr Govertsin full believes that gaming revenue will repeat previous V-shaped recoveries, but he warns against looking for a turning point. “There won’t be any sign. It’ll happen quickly,” he says. “It may trickle back before it explodes back. Our contacts in VIP andpremium mass say there’s pent up demand. They want to visit, to come back. Suddenly it will be MOP 23-25 billion a month.”

Mr Govertsen thinks the lack of new resorts has hurt visitation, “I used to live in Las Vegas. Every time I go back, there’s something new and different. Macau has been the same.” Growth in Chinese travel to Korea and Japan partly reflects Macau’s absence of openings, he says. Even without a VIP recovery, he sees mass demand filling new hotel rooms.

“Studio City could reinvigorate demand in a normal environment,” he says, but Macau 2015 is a different era compared to previous openings. Along with the market malaise, he cites temporary issues related to the project, including “construction disruption” from Parisian next door cutting Studio City off from the rest of Cotai and light use of the Lotus Bridge border crossing adjacent to the property. He also notes, “Melco Crown owns 60% of Studio City, so it’s better to drive business to City of Dreams with 100% ownership.”

Mr Govertsen says, “By 2016, maybe something will have changed on the demand side with new, more compelling properties. Then it can reinvigorate the market.” But creating lasting mass-market growth isn’t just about new resorts. “Value for money on non-gaming needs to change. It’s changing and needs to change,” he says.

“Resorts in Macau are terrific, but they don’t have the same sizzle as Las Vegas,” Mr Govertsen says. “With more resorts, they’re getting better. But Macau needs to become number one in casino resorts.”

Editor at large Muhammad Cohen also blogs for Forbes on gaming throughout Asia and wrote Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie.


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