DB: Macau in “multi-year earnings decline”
The ongoing turbulence of the casino market in Macau Beware has analysts arguing about the long-term health of the world’s leading gaming destination.
According to the Macau Business Daily, there’s no recovery in sight, and investment banks including Wells Fargo, Nomura and HSBC are predicting a 40 percent drop in gaming revenues for March (with a parallel drop in stock prices).
“I don’t think brokers are courageous enough to recommend buying at this moment,” Ben Kwong of brokerage KGI Asia Ltd. told the Hong Kong Standard. “The number of visitors is dropping due to China’s anti-corruption policies and operating costs are rising.”
Japanese brokerage house Nomura said in a January note that it was “significantly” lowering its projected rates of return on invested capital for the upcoming Cotai casino resorts in Macau, with table allocation “40 percent to 50 percent lower” than previously expected by developers.
Deutsche Bank AG analyst Karen Tang just put a “sell” rating on all Macau casino stocks, and observed that the current generation of high rollers is unlikely to be replaced over time. Deutsche Bank is predicting that VIP revenue in Macau will tumble 35 percent year-on-year in 2015.
“Over Chinese New Year, many premium mass players went to Europe, Japan and South Korea instead on weaker currencies,” Tang wrote. “Many casinos had to comp rooms to lower-tier players. We think the Street still underestimates this…operating leverage, and its margin impact.”
Gross gaming revenue this year may drop 18 percent, JPMorgan Chase & Co. said March 8 as it cut ratings on Sands China and Wynn. HSBC Holdings and Citigroup Inc. are projecting declines of 21 percent and 16 percent respectively. Barclays Plc. said casino receipts may continue to decline until the fourth quarter of this year.
No less an expert than Ambrose So Shu-fai, CEO of SJM Holdings, expects the industry to generate 300 billion patacas (US$34 billion) for the year, down 14.7 percent from 2014. So also sees an upturn in the second half of the year.
Fitch Ratings agrees that the downturn is temporary and says the jurisdiction is likely to rebound with new resorts and a stronger demand for mass-market gaming. And Wells Fargo analysts Cameron McKnight, Rich Cummings and Tiffany Lee wrote, “The near-term Macau outlook is uncertain but operators remain positive on the long-term opportunity.”
Some say the downturn began with a softer Mainland Chinese economy, which prompted the government of President Xi Jinping to try to keep more money at home. That concern may have inspired the crackdown on corruption and money laundering in Macau, the only place in China were casinos are legal.
According to SBC News, the Chinese Security Ministry is now warning Mainland officials and Chinese business leaders that they will be monitored if they visit Macau to gamble.
“Moreover, because of measures taken by Macau’s gambling industry, if such officials go gambling in Macau, they will be discovered,” said Li Gang, director of Macau’s Liaison Office, speaking to the Beijing News.
Li Keqiang, premier of the State Council of the People’s Republic of China, affirmed the government’s hard line against graft and money laundering in Macau, saying, “Our tough stance on corruption is here to stay; our tolerance for corruption is zero, and anyone guilty of corruption will be dealt with seriously. We will see to it that every instance of corruption, should it be committed higher up or lower down, is severely punished.”
Optimists believe the downturn is a turn in the right direction, as President Xi forces Macau to do what it otherwise might not attempt: diversify an economy that has relied on gaming for some 80 percent of total revenues. Casino tycoon David Chow told the Macau Daily Times that the city would be well served to “think about creating new markets.”
For example, the Daily reports that revenues from MICE events (meetings, incentives, conferences and exhibitions) more than doubled in 2014, to MOP278.4 million (US $34.8 million). However, subsidies of these events by the government or other organizations also rose 42.3 percent over 2013.
Chow points out that the city’s chief industry has a long way to fall before it begins to hurt. “Even if the gaming revenue plunges to MOP15 billion (US $1.8 billion) per month, it won’t be a big deal. …With so much money already earned, why are they still arguing? Can’t we just earn less for now?”
Economist José Isaac Duarte agrees. “Either we go down a different path, or the economy will rely increasingly on gaming and people will visit only to gamble… There is the need to attract tourists with diversified interests and who are willing to stay longer.”
Wells Fargo analysts say the anti-corruption campaign “will continue to affect high-end player sentiment and spending habits” in 2015, but is “part of a longer term process to strengthen the Chinese economy rather than a short-term mechanism.”
And Macau Chief Executive Fernando Chui Sai has described himself as “cautiously optimistic” about the economy in spite of the slump, now in its ninth month.
Collectively, the gaming companies lost about $92 billion in market value over the past year, according to Bloomberg.
