Macau gaming revenues suffered their worst year-on-year drop on record in October, falling 23.7 percent against the same month last year.
The 35 casinos took in MOP28 billion (US$3.5 billion), which paled against October 2013’s $4.6 billion month, the market’s second-best month on record, even though in absolute terms this October was “broadly in line” with the range from June to August, noted Union Gaming Research Macau, and almost 10 percent higher than September, which was a low in absolute terms at MOP25.2 billion.
Revenues are down five straight months in the Chinese gambling hub, and it isn’t expected to improve in the months ahead as tougher comparisons weigh on investor sentiment.
“Assuming that November and December look more like September, we currently expect declines of 16 percent and 24 percent, respectively, to round out the year,” the brokerage wrote in a client note. “This would result in total 2014 revenue down 2 percent to MOP355 billion ($44.4 billion).”
Most analysts are looking for about the same. Aaron Fischer, a Hong Kong-based analyst at investment bank CLSA, told Bloomberg, “The revenue will remain very weak for the next few months, we expect November and December to also be down quite a bit,” although he added that the downturn might not hit casinos’ income as badly because most of the drop was from the VIP segment, which tends to have lower margins.
VIP has reeled in the second half of this year from the Chinese government’s aggressive crackdown on corruption and graft, while declining property prices on the mainland, coupled with slowing economic growth, has tightened the credit markets on which the sector depends.
The corruption issue is expected to loom large well in the future following the announcement that the government has created a special agency to investigate and prosecute cases. “This represents the institutionalization of the anti-corruption drive,” said UGRM, signaling that it “is far from over and is likely to continue to impair Macau’s VIP market for a significant period of time.”
The higher-margin mass-market is slowing down as well. It fell 8 percent in October, the first negative year-on-year comparison this year.
“Trends are expected to remain rocky through year-end,” Wells Fargo analyst Cameron McKnight said. “Chinese macroeconomic data remains soft.”
The consensus among analysts is that things will continue to look bad heading into 2015. Last spring was one of the market’s best ever. February, fueled by Chinese New Year, produced a record $4.8 billion, a 40 percent increase over the same month in 2012.
“We currently see no reason that trends should materially improve in 1Q15 relative to current levels , which implies no better than negative 15 percent y/y during the quarter,” said UGRM. “It is important to keep in mind that the February comp will be particularly difficult.”
The firm isn’t alone when it comes to uncertainty about where the bottom is. Most are forecasting a revival around the second quarter as the comparisons get easier, and share prices, which have taken a beating, rise on anticipation of the first new resort openings on Cotai in the second half.
Deutsche Bank, for one, believes the worst is likely over. Writing before the October numbers were released, analyst Karen Tang said she has seen “no signs of recovery yet,” but cites improvements in leading indicators such as the French Fine Wine index and China property transactions as indicators that trends may be improving.
Kim Iskyan of independent research house Stansberry & Associates told The Wall Street Journal shares should bounce back because valuations are low, the new resorts will drive growth, and Beijing won’t ultimately do anything to kill their “enormous golden goose”.
Bank of America Merrill Lynch, in the meantime, has advised investors to start buying again, citing cheaper stocks and attractive dividends.
Fischer said he also maintains his “buy” rating on the sector. He told the Journal reason investors have been spoiled by the boom of the last five years and that the markets have still to value in the six to eight new resorts scheduled to open over the next three years.
