Some analysts foresee change in second half of 2015
Macau enjoyed record-breaking visitation during the Lunar New Year holiday in February, with an estimated 800,000 visitors crowding its borders and airports. Yet the gaming industry’s historic decline has only deepened.
Year-on-year gross gaming revenues dropped a startling 48.6 percent to 19.54 billion patacas (US$2.4 billion) for February, the ninth straight month of decline in the world’s leading gaming destination.
Accumulated gross revenue for the year so far is 43.29 billion patacas (US$5.41 billion), down more than 35 percent decrease from the 66.74 billion patacas (US$8.35 billion) generated during the same period last year.
The drop was not as sharp as some expected, however; eight analysts surveyed by Bloomberg News had predicted revenues could fall off as much as 54 percent.
Macau’s unprecedented slump began last summer when the government of Chinese President Xi Jinping started cracking down on graft and money laundering. The high-profile campaign scared off high rollers who once were responsible for up to 60 percent of gross gaming revenue in the city. The slide continued as China enacted new restrictions on visas and smoking, measures that discouraged mass market gamblers.
To make matters worse, mainstream tourists are spending less, to the detriment of the city’s restaurants, retail malls, and hotels. Shopping by Chinese tourists dropped 32.8 percent to 1,079 patacas in the fourth quarter of 2014, according to data reported in Bloomberg. Hotel occupancy during Golden Week fell 6.9 percent and average room rates declined 15.4 percent, said the Macau Government Tourist Office.
In a February 25 note, JP Morgan Chase analyst DS Kim said the New Year holiday was “shockingly bad” for Macau’s premier industry. Revenues were “very disappointing to us, as it was nearly 40 percent below what we had anticipated,” wrote Kim. “Even premium mass demand remained very muted.”
According to the Macau Daily Times, the slump is expected to continue. “The Chinese government is determined to pursue its anti-corruption drive,” said Daphne Roth, head of Asian equity research at ABN Amro Private Banking, “and that’s negative on the casino stocks.”
“We believe the situation is likely to deteriorate in the coming months,” agreed Credit Suisse analyst Kenneth Fong. “On the VIP side, with more junkets shutting down business post Chinese New Year and working capital in the system shrinking, revenue may see another leg down.”
“With all the current policies from China and the changing sentiment in Macau, we were not expecting the main driver for revenue to improve,” said Simsen International Financial Group associate director Jackson Wong. “A lot of people have lost faith in the sector and that’s why it has plunged.”
Overall, the industry may see another 8 percent drop in 2015 after last year’s decline of 2.6.
Trading that followed the New Year could indicate things to come, with MGM China Holdings Ltd. falling 7.2, Sands China Ltd. dropping 5.8 percent and Galaxy Entertainment Group Ltd. falling 5.1 percent to become the worse performers on the benchmark Hang Seng Index.
But some observers believe the industry in Macau will start to rebound in the third and fourth quarters. “There is a good case for a recovery later in the year,” said Tim Craighead, a Bloomberg Intelligence analyst in Hong Kong. “The launch of new resorts that attract mass market gamblers, and easier comparisons” from the year-earlier period would also ease the pain.
“The biggest culprit for the weak month was the already-troubled VIP segment,” said Grant Govertsen, an analyst at Union Gaming Group. “While we believe there was a pickup in VIP headcount, gaming volumes just weren’t there.”
Meanwhile, Chinese tourists are avoiding Hong Kong as well as Macau and making a beeline for Korea, Thailand and Japan, which have seen a spike in tourism, reported Barron’s.
President Xi has ordered Macau to diversify its economy. Leonardo Dioko, director of the International Research Centre of Macau’s Institute for Tourism Studies, says the city has “no other option.”
Michael Gift, professor at the University of Macau, said the city could benefit long-term. “Macau will not be a one-horse town, only based in casinos, but the diversification will take place within the tourism and hospitality industries,” he told the Las Vegas Review-Journal.
Operators are taking note. There is plenty of new development to come on the Cotai Strip, and the resorts are including lots of mainstream nongaming entertainment. The $3.2 billion Studio City, for example, owned by Melco Crown, is a Hollywood-inspired complex with a Batman virtual-reality ride.
“We are putting together a tourism master plan and there are several integrated resorts to be opened soon; that’s a very important step,” said Gift. “We need to make sure we capitalize on the entertainment side of resorts.”
On an optimistic note, Sterne Agee gaming analyst David Bain said things should look up from here, one step at a time. “We continue to expect February gross gaming revenue growth results to mark the bottom with March ending second to February in terms of growth,” Bain told the Review-Journal. “In other words, March growth should be less bad than February, and April less bad from March.”
As a sign of the contraction in Macau, market-leading SJM Holdings Ltd. saw a 12.7 percent drop in profits for all of 2014to HKD6,731 million, the operator revealed in a press release. SJM said that the adjusted EBITDA of the group decreased by 10.5 percent to HKD7,763 million, with revenues down 8.8 percent year-on-year over 2013. That decline was more than three times the industry average, reported the Macau Business Daily.
It was “a challenging time for Macau’s gaming industry, particularly the second half,” said SJM Holdings’ CEO, Ambrose So. “Nevertheless, the efforts of our team and the appeal of our products enabled SJM to maintain the number one position in our industry as well as to make significant progress in construction of the Lisboa Palace on Cotai.”
He added that the new resort will cost millions more than originally expected. In early 2014, SJM estimated the Lisboa Palace would cost HK$25 billion. It has now revised the figure to HK$30 billion (US$3.9 billion).
