Another junket theft adds to turbulence
Macau finished the year better than many analysts predicted, but was still down by double digits.
According to Bloomberg News, most casino concessionaires saw a boost in share values after the December numbers showed a smaller-than-expected dip in gaming revenue. GGR dropped 21.2 percent for the 19th straight month of decline in the Chinese territory; it was the smallest monthly year-on-year drop in a full year. Some market observers had predicted declines of up to 28 percent.
December was “about the best we could hope for in terms of finishing the year,” said Union Gaming analyst Grant Govertsen, adding that both the mass-market and VIP segments did better than forecast. For the year, GGR was down 34.3 percent to 231 billion patacas (US$29 billion). Despite the slight uplift, Govertsen said VIP gaming is looking at another tough year, with a possible decline of 12 percent. “Our estimates contemplate continued demand weakness, which will likely be exacerbated by pressures on the regulatory front,” he said, referring to the ongoing crackdowns on junket operations and a possible smoking ban.
Govertsen was more optimistic about the mass market, saying, “Mass will continue to outperform VIP going forward having already demonstrated stabilization over the last two quarters. The biggest question mark remains whether new supply will be enough to entice customers to come back to Macau and forego spending leisure and entertainment dollars in other places like Japan and South Korea.”
To put it in perspective, Macau’s casino industry—which generated about seven times more gaming revenue than the Las Vegas Strip just two years ago—has seen its lead narrow to 4.6 times the Sin City total. Macau saw a record $45.2 billion in gaming revenue in 2013, and the Las Vegas Review-Journal says the recent results marked the first time since 2010 the casino industry in Macau failed to hit $30 billion.
Fitch Ratings analyst Alex Bumazhny said he expects revenues to drop as much as 5 percent in 2016, but added, “We’re starting to see its long-term potential on the horizon. Fitch believes Macau’s gaming growth prospects will remain dependent on travel policies and infrastructure, available credit for the VIP segment, perceptions about the mainland’s corruption crackdown, and domestic policies like the smoking ban.”
Aaron Fischer, head of consumer and gaming research at CLSA Ltd., told Bloomberg, “It would be difficult for the first half of the year for sure because there’re not so many catalysts to drive a rebound.”
“Conversations with casino operators don’t give us confidence that junket volumes improve in the New Year,” Union Gaming Group LLC analyst Christopher Jones said. “Most seem preparing for further moderation in junket VIP in 2016.”
Due to long-term upheaval in the territory, Macquarie Research has advised investors to wait before trying to get a deal, according to the Asia Gaming Brief. “We believe the structural growth of Macau GGR won’t come back in the next two years and the multiples do not look appealing,” the company warned.
But the news is not all gloomy. “We think there are tactical trading opportunities in CY16,” generated by new casino openings; GGR results in key months including May and October; government actions on the smoking ban, money laundering and its visa policy; and “regional completion such as the openings of Shanghai Disneyland, Genting Malaysia Tower 2A remaining phases, Naga2 in Cambodia and Grand Mariana in Saipan.”
Despite concerns about oversupply with the openings of Galaxy Phase II, Galaxy Broadway, Melco Crown’s Studio City and a host of others in the wings, Bloomberg called the added inventory “potential bright spots” that could entice tourists to return. This year, three U.S. operators—Wynn Macau Ltd., Sands China Ltd. and MGM China Holdings Ltd.—all will open lavish new resorts on the Cotai Strip.
Other factors may stall the recovery, including a cap on table games and restrictions on the use of China UnionPay Co. debit cards, which some gamblers use to access easy cash for gambling. Deutsche Bank has estimated that such transactions account for 10 percent to 15 percent of all cash accessed by gamblers in Macau.
But Union Gaming says heightened scrutiny of debit-card transactions is really the least of Macau’s problems. “We do not buy into the doom and gloom scenario that there will be a wholesale stoppage of UnionPay as a means to get cash while in Macau,” the firm noted. “We ran the numbers again and believe that the high-end of UnionPay risk is probably less than 2 percent to GGR and less than 3 percent to EBITDA.”
Meanwhile, another alleged junket room theft making headlines in Macau is likely to reinforce the government clampdown on such operations. According to GGRAsia, the case involves a longtime employee of the casino at L’Arc on the Macau peninsula. The employee, who has not been named or charged, may have made off with funds totaling HKD99.7 million (US$12.9 million). L’Arc is a satellite property that operates under the license of gaming concessionaire SJM Holdings Ltd. The purported theft follows close on the heels of the Dore Entertainment theft, in which a cage cashier may have embezzled HKD520 million (US$67 million) and possibly more.
Deutsche Bank AG’s Karen Tang wrote, “While the amount is smaller than in previous times, this incident will likely prompt the new DICJ head, Paulo Martins Chan to tighten regulations on junkets, especially the way junkets raise capital.”
Overall, most industry observers expect the decline to ease in 2016. David Chow Kam-fai, co-chairman of casino operator Macau Legend Development, told the Hong Kong Standard he anticipates that 2016 casino revenues will come in at around 200 billion patacas (US$25 billion), a 13.4 percent drop from 2015. Bloomberg analysts have forecast a 13 percent drop in the VIP segment this year, and with a 6 percent rebound for the mass market.
Fernando Chui Sai On, Macau’s chief executive, has acknowledged the pain, saying the local economy is in a “profound adjustment phase.” He pointed out that “adequate diversification” of the economy will restore the city to a place “with ideal conditions to live, visit and work.”
