Macau’s November Not Looking Good

Macau continues to reel from political and economic headwinds out of China, and analysts see no let-up on the horizon for at least several months. Their forecasts for November call for another month of double-digit declines, led by flagging VIP play (VIP room at Galaxy at left), but most remain believers in the underlying strength of the market.

Fitch Ratings Service expects no growth in Macau’s world-leading casino revenues this year and a 1 percent decline next year.

The somber assessment by the credit advisory agency comes after five straight monthly declines in revenue compared to last year as VIP play, from which the casinos generate most of their annual take, has plummeted in response to a Chinese government crackdown on corruption and slowing economic growth on the mainland.  

Analyst Michael Paladino told investors the market might not recover until two major new resorts open in the Cotai resort district in the second half of next year: Galaxy Entertainment’s expansion of the Galaxy Macau and Melco Crown Entertainment’s opening of Studio City.

Macau’s 35 casinos produced a record $45.2 billion in gaming revenue in 2013, and the market is up 2.3 percent through October, which saw the worst year on year drop since the end of the monopoly era in 2004, in part because last October was the second-best revenue month on record.

Wells Fargo Securities gaming analyst Cameron McKnight predicted revenue will be down another 18 percent to 21 percent in November, and cited continued bank credit decline in China as a sign that VIP play, which is almost entirely credit-driven, will not recover anytime soon.

“We believe growth in credit is necessary for growth to resume in Macau,” McKnight and two other analysts said in a recent client note. “In our view, Chinese credit growth is one of a few key leading indicators of Macau revenue growth.”

Official data released this month total bank lending and other forms of credit on the mainland fell 36 percent month-on-month in October and more that 20 percent year on year, with recent data pointing to further weakness, according to several financial analysts.

 “We estimate credit growth leads VIP growth by six to 12 months and we have yet to see a meaningful uptick in credit growth [in mainland China],” the analysts pointed out. “If [central] government policies towards Macau do not ease or credit does not begin to improve, we do not expect growth to turn positive until at least the third quarter of 2015 on easier compares.”

Sterne Agee gaming analyst David Bain told investors last week’s Macau Grand Prix auto race would hurt high-end gambling revenue during November, but could actually provide a small boost to gaming revenue overall. Bain also predicts an 18 percent to 21 percent decline.

Bain said there has been little change to the main issues facing Macau, and President Xi Jinping expected visit in December may also hurt high-end visitation.

Fitch concluded its analysis on a positive note. “We do remain favorable on Macau, as we continue to hold that Macau and the greater China market remain underpenetrated,” Paladino said. “We expect gaming revenue growth will be driven by new supply and infrastructure development and that the Chinese economy will continue to grow, anchoring mass-market demand.”

Similarly, Citi Research issued a somewhat upbeat assessment based on positive trends in hotel occupancy and says casino operators appear set to avoid a price war amid the current slowdown.

Apart from Sands China, which has 10,000 rooms and an occupancy rate close to 90 percent, other major casinos are almost at full capacity with 98-100 percent occupancy.

The bank also says casino operators have learnt from past experience and are unlikely to compete on price. In 2008/09 during the financial downturn, a price war broke out as operators competed on junket commissions.

The companies themselves are also expected to maintain strong balance sheets and remain cash flow generative despite the recent weakening in revenue growth, the bank said.