Battle of the bears and bulls
Is Macau Chief Executive Fernando Chui Sai On a pessimist, a realist or a strategist?
The global casino industry was rattled by Chui’s recent prediction that Macau could see a 32 percent plunge in gaming revenues this year?two to four times worse than the market consensus, according to the Macau Business Daily.
But by overestimating the drop, Chui could be creating a mindset in which anything better than a one-third decline would bring sighs of relief.
“It may be better for an official to slash things so much that they can then eventually get into positive revision mode from a low base,” said Tim Craighead, head of Asian research at Bloomberg Intelligence. “If they use this as a base assumption, it emphasizes the need to diversify the economy, which is already in the plans.”
In his 2015 policy address earlier this month, Chui said that average monthly gaming revenues will top out at MOP20 billion (US$2.5 billion) this year, almost 30 percent less than the previous government estimate, and a far cry from the MOP30 billion average reported in the last three years. Altogether, if his estimates prove accurate, the market would see an overall decline of 32 percent. Macau’s economy shrank 17 percent in the final quarter of last year, and casino revenues slipped 2.6 percent for the year, the first decline in Macau’s history as a legal gaming destination.
Chui called it the “new normal” in Macau. The city is under orders from Beijing to eliminate graft and corruption by high rollers, and to diversify its economy beyond gaming, which has historically been responsible for up to 80 percent of government revenues.
Other measures that could weaken the industry are a possible full smoking ban, stricter visa rules that could limit tourism, and greater scrutiny of three gaming concessionaires and three sub-concessionaires looking to renew their licenses. The U.S. investors include Wynn Resorts Ltd., the Las Vegas Sands Corp. and MGM Resorts International.
According to the Macau News, the CE said the government will look at eight factors during the midterm review. They include the impact of a resort on the local economy; the impact on the local job market; the “interaction between the gaming and non-gaming sections of the gaming industry”; the level of adherence to their gaming contracts; the business’s corporate responsibility; and the overall success of the business.
Chui said he is “cautiously optimistic” about the future of the industry. “Why have I said that we are optimistic about the gaming industry? The main reasons are huge development projects in Cotai, due to be completed on schedule (and) the number of visitors continues growing. In 2014, there were a recorded 31.5 million visitors.
“The figures show that the city’s tourism and gaming industries are still competitive and they are already equipped to face the challenges ahead. … We are optimistic about and confident in their development,” Chui said.
Craighead agrees that new development on the Cotai Strip could help. “We do think the new resorts will add some draw to mass market patrons, a jump in new hotel rooms will allow overnight visitors to increase again,” he told Bloomberg. “This should gain steam into 2016, especially if Chinese economic stimulus is successful.”
Despite some positives, the Las Vegas Review-Journal reported that Chui’s speech was “not the message Vegas wanted to hear.” Li Gang, director of the Chinese government’s local liaison office, has said it may take 20 to 30 years to create a stable, diverse economy in Macau. But Deutsche Bank gaming analyst Andrew Zarnett continues to insist that the current downturn is cyclical. “Our confidence in the secular growth story of Macau gaming remains intact,” he said.
Nevertheless, according to GGRAsia, the numbers for March look bleak indeed. Credit Suisse analysts Kenneth Fong and Isis Wong say the year-on-year decline in GGR for March should fall between 35 percent and 39 percent, to MOP21.7 billion.Michael Ting of CIMB Securities Ltd. in Hong Kong says GGR should fall by 39 percent. “We estimate that VIP revenue will fall 51 percent year-on-year and mass market will decline by 19 percent,” Ting said. Daiwa Securities Group analysts Jamie Soo and Adrian Chan think GGR for the month is likely to drop 37 percent to 38 percent.
Japanese brokerage Nomura had an even gloomier outlook, predicting a decline for the whole month of 38 percent to 41 percent.
For encouraging words, investors can look to U.S.-based investment bank Brean Capital. According to the Macau Business Daily, the investment bank says the second half of the year will see a rebound with the opening of Galaxy Phase II in May and Melco Crown’s Studio City later in the year, which will add 5,200 hotel rooms to the city.
Galaxy Deputy Chairman Francis Lui echoed that assessment. “I believe we will gradually see a recovery in the second half of this year; I’m not worried about whether there is any massive structural problem,” Lui said, after Galaxy earnings plunged 25 percent in the fourth quarter. He said the company “won’t change its long-term business strategy in the midst of business cycles.
“Our investment is trying to provide a full range of choices for the people going to Macau,” Lui added. “In the past, resorts would only focus on the gaming aspect but now the resorts will be more a destination for holidays that is not only for gaming. We are moving into a new era.”
