Li visit may quench optimism
Could the long downward slump in Macau finally be nearing an end? If September is any indication, the jurisdiction is finally righting itself after a two-year decline.
Galaxy Entertainment Chairman Lui Che Woo told CNBC that the casinos in Macau can now “see the bottom.”
“In the future, I think we will start to recover,” he said, “as other companies in the industry are investing in their facilities and moving their direction to the mass market.”.
Gross gaming revenues for the month rose 7.4 percent to MOP18.4 billion (US$2.3 billion), according to data from the Gaming Inspection and Coordination Bureau. That followed a 1.1 percent bump in August, which itself followed 26 straight months of decline in the world’s premier gaming town. The numbers for last month beat expectations, too—a Bloomberg survey of nine analysts estimated more modest growth of about 4 percent for September, usually a weaker revenue month in advance of October’s Golden Week.
In mid-2014, Chinese President Xi Jinping ordered the city to diversify its gaming-centric economy, and also cracked down on corruption, money laundering and graft. That sent big-spending VIP players running for cover and decimated the junket industry that supports them. Since then, Macau has been working to transform itself into a multidimensional tourist destination rich in non-gaming amenities, mainstream attractions and even family-friendly activities.
“Macau is also unquestionably a more attractive tourist destination than it was last October,” according to Forbes, which noted not only the September openings of Sands China’s Parisian Macao and Wynn Resort’s Wynn Palace, but also the late 2015 addition of Melco Crown’s movie-themed Studio City, “with its Batman ride, magic show, Warner Bros. Fun Zone and Golden Reel observation wheel.
“Cotai has a broader portfolio of things to see and do besides gamble, eat and shop at a broadening range of price points,” reported the magazine—and that’s just what the Xi government wants to see.
Aaron Fischer, an analyst at CLSA Ltd. told the Macau Daily Times that the openings of the Parisian and Wynn Palace have eased the shortage of hotel rooms in the city, a definite plus. But Union Gaming analyst Grant Govertsen warned that an upcoming visit by Chinese Premier Li Keqiang “could potentially result” in a return to negative growth in October, “exclusively at the high-end of the market.”
“We are pleased with the direction of gross gaming revenue and we are generally looking for positive year-on-year trends going forward,” Govertsen wrote. “However, it’s likely that October’s year-on-year growth rate will be less robust than September given Li’s visit.”
The premier is expected to attend the fifth annual Ministerial Conference of the Forum for Economic and Trade Cooperation between China and Portuguese-speaking Countries, October 11-12 in Macau. The visit “is unlikely to bode well for VIP revenue,” agreed HSBC Holdings analyst Charlene Liu.
Needless to add, two months of gains does not make a recovery. The openings on Cotai added a total of 4,700 guest rooms and more than 200 new retail outlets to the city, but it may not be all smooth sailing from here, reported the Macau Business Daily. Wells Fargo Securities expected the results from Golden Week to be flat. And Galaxy Entertainment Chairman Lui Che Woo has said he would not call it a recovery until the city’s main industry sees two full years—not months—of progress.
According to GGRAsia, analysts DS Kim and Daisy Lu of JP Morgan Securities said September was the first time in 29 months that Macau had posted a year-on-year expansion of VIP revenue.
“We view the surprise as coming from the VIP segment, which we estimate to have risen circa more than 5 percent year-on-year,” the analysts wrote. “The key question would be whether or how long this VIP momentum is sustainable.”
A note from Deutsche Bank Securities Inc. predicts that October GGR may grow 8.5 percent year-on-year. But Carlo Santarelli and Danny Valoy added, “While the September results are stronger than expected from a sequential and supply-adjusted framework, we believe the honeymoon periods of both Parisian and Wynn Palace played a role and hence, we believe the fourth-quarter results will be more telling.”
Lionel Leong Vai Tac, Macau’s secretary for Economy and Finance, says the government is confident that full-year GGR will reach the government’s MOP200 billion (US$25 billion) target.
And David Katz of Telsey Advisors said growth in the market “is unarguably positive.
“Concerns over the growth in supply in the market have been well-founded, although they were based on market expectations that were lower than what we have seen so far,” Katz continued. “Comparisons will become marginally more challenging in October and December when the prior year declines were 28.4 percent and 21.2 percent, respectively. While success will be determined in the longer term, we remained focused on the ramp-up at each new property in the coming months.”
If the market continues to grow at better-than-expected rates, it’s possible that “all operators in the market” may exceed expectations, he said. “Wynn remains our top choice based on its leverage to its new property, but MGM is also at attractive levels for non-Macau reasons and our bias toward Las Vegas Sands becomes increasingly positive based on the Parisian opening.”
Galaxy’s Lui says that his company didn’t lose any market share due to the opening of Wynn Palace and the Parisian. “We saw a little growth instead. On the surface, you think it’s more competition, but in fact, it’s growth in the marketplace.”
In a recent research note, CLSA observed that foot traffic has been stronger at the Parisian than at the Wynn Palace, with Parisian attracting 45,000 visitors a day compared to 15,000 at Wynn. It’s all about location.
“The Parisian benefits from its connection to neighboring resort, the Venetian and Sands’ other Cotai properties that see daily visitation of more than 100,000,” the brokerage noted. “Wynn, on the other hand, is on the edge of Cotai, with City of Dreams being the nearest neighbor and poor connectivity between the two.”
CLSA said it expects Macau GGR to decline 6 percent in 2016, followed by a gain of 5 percent next year and 6 percent in 2018 led by the mass market. In VIP, it has forecast a decline of 17 percent this year, a decline of 4 percent next year and 2 percent growth in the next three years. Mass is likely to grow 4 percent in 2016, 12 percent next year and 9 percent in 2018, the firm added.
