New junkets face more barriers to entry
Deutsche Bank Securities Inc. says market fundamentals in Macau are “less bad,” but not really improved as the jurisdiction moves toward the second anniversary of an historic recession.
Deutsche Bank analysts Carlo Santarelli and Danny Valoy, in a note on Wynn Macau cited by GGRAsia, said they see a number of challenges in the city, which remains the world’s top gaming town:
“a mid-teens supply growth over the next two years, negative visitor volume trends (and) a market that is becoming more mass revenue-reliant.” They downgraded their recommendation on Wynn Resorts from “buy” to “hold” despite a year-to-date stock price increase of about 40 percent due to concerns about the Macau casino industry.
In the next year, a number of new resorts will open to compete with those that are already struggling after 22 months of consecutive revenue losses: the Wynn Palace; Sands China’s Parisian Macao; and MGM Cotai.
“Since June 2015, and excluding the holiday months of October and February, average daily GGR has trended at around US$73 million per day,” the analysts noted. “This is encouraging given the potential for positive year-on-year comparisons is evident as we move into the summer months. But, they added, “It is important to remain cognizant of the impact new supply will continue to have on the market as it pertains to EBITDA margins, in a flat-to-no-growth environment, and on returns on invested capital. Said differently, we think there is considerably more to the Macau stories than simply the direction of the top line.”
That sentiment is shared by Fitch Ratings Inc., which recently warned the 2016 opening of Wynn Palace and Parisian Macao on the Cotai Strip would lead to cannibalization of existing properties in the city. Making matters worse, the number of visitors to Macau is on the decline, if only slightly, reported GGRA; in January and February, the city welcomed 5.1 million visitors, down by 1.0 percent year-on-year.
“If visitation trends were more encouraging, as the market continues to transition to mass, we believe more optimistic mass forecasts could be rationalized,” said Santarelli and Valoy. “But relying on sharp accelerations in spend per visitor or a dramatic change in visitor volume seems challenging at this stage.”
As the story unfolds, the city government is considering higher capital requirements for new junket operators, reported Bloomberg News. One proposal includes would raise the requirement from MOP100,000 to MOP10 million (US$1.3 million), and also requires at least one shareholder to be a Macau resident, reported the Asia Gaming Brief. The new rules would not apply to existing licensed junket operators. On the news, CLSA gaming analyst Aaron Fischer told Bloomberg, “We’re not expecting many, if any, new junkets in Macau as the current ones are fighting for survival.”
It’s not all doom and gloom in Macau, however. Wynn Resorts Macau Executive Director Linda Chen recently told reporters the company expects the gaming industry to “stabilize and gradually see a slight increase by the end of the year.”
About $46 billion of market value was wiped out in 2016 as casino revenues plunged to the lowest level in five years. Sands China has gained 48 percent after hitting a four-year low in January; MGM China Holdings Ltd. has risen 24 percent this year, reported AGB.
Daiwa analysts Jamie Soo, Adrian Chan and Jennifer Wu said, “On the ground, we continue to observe overall weak gaming volumes across properties. At the current run rate, we continue to expect April to see a 15 percent year-on-year decline in GGR, likely reaching all-in GGR of approximately MOP16 billion (US$2 billion).”
David Bain of brokerage Sterne Agee CRT said in a note that he expects a 12 percent GGR decline in April.
