“All eyes” will be on the Macau casino sector’s performance during the Lunar New Year holiday in February as a pointer for the industry’s prospects for 2015 says a note from Daiwa Securities Group Inc in Hong Kong.
“We believe all eyes will be on the 2015 Lunar New Year in February. The 2014 Lunar New Year was the best performing period for GGR [gross gaming revenue] in the Macau gaming industry’s history. If the performance this Lunar New Year is as lacklustre as in the October 2014 Golden Week, we believe casino operators may react by being more aggressive in defending market share (especially given impending openings of new properties),” wrote analysts Jamie Soo and Adrian Chan.
Karen Tang of Deutsche Bank AG in Hong Kong, in a note on Monday fleshed out precisely how that competition might occur.
“As the mass market shrinks, we expect competition to intensify. Anecdotally, we hear that casinos are not only competing on player ‘comps’ (free rooms, food and beverage) but also on host compensation,” she wrote.
Ms Tang added, again referring to the cost to the casinos of attracting and retaining players: “We expect reinvestment rate to increase from low-teens [of percent] currently to mid-teens in 2015-16. Coupled with rising labour cost, we expect four of the six [Macau] companies to hit negative operating leverage in 2015.”
Deutsche Bank’s point is that investors need to pay attention to the cost of Macau casinos’ sales rather than pure GGR numbers.
Credit Suisse AG estimated last week that the market wide 30 percent decline in GGR seen in December included a mass market decline of up to 19 percent judged year-on-year. The figures are based on unofficial industry estimates, but such estimates on the revenue split and revenue performance are typically within a few percentage points of the official numbers. Those for the fourth quarter 2014 are expected later this month.
Cameron McKnight, Rich Cummings and Tiffany Lee at Wells Fargo Securities LLC in New York, in a note also on Monday, gave some colour on another facet of the Macau market’s moving parts; the varying degree to which some Macau operators have been affected by the slowdown during December of higher margin mass market revenue.
Wells Fargo acknowledges that its December comparison picture was muddied by some reclassification by casino operators of mass-market tables to VIP ones. That was a move some casinos made in the fourth quarter in order to allow casino patrons to continue smoking following new tobacco use restrictions for mass market casino areas introduced in October by the Macau government.
The institution also quotes “unadjusted” estimates for the named Macau operators – i.e., numbers that do not take into account the theoretical hold rate for baccarat, Chinese players’ game of choice in Macau.
“MPEL [Melco Crown Entertainment Ltd] unadjusted mass revenue declined 55 percent year-on-year (estimated like-for-like -10 percent year-on-year). We believe this is a result of MPEL’s table reclassification,” wrote Wells Fargo.
Nomura analysts Harry Curtis, Kelvin Wong and Brian H. Dobson said in a note on Monday referring to the whole Macau market: “After adjusting for the table shift at MPEL and MGM [China Holdings Ltd], we estimate that ‘actual’ mass revenues were down 20.4 percent [year-on-year in December] and ‘actual’ VIP revenues were down 35.6 percent.”
Supply and demand
Investment analysts seem broadly to be divided into two camps regarding the GGR outlook for the Macau market as a whole in 2015.
Some think this year’s new openings – Melco Crown’s majority-owned Studio City and Galaxy Entertainment Group Ltd’s Galaxy Macau Phase 2 – will drive fresh demand, as has happened in the past for many major openings. Others, including Daiwa, are sceptical.
An example that appears to lend weight to the ‘supply creating demand’ thesis is from 2007. Following the opening of Las Vegas Sands Corp’s Venetian Macao on August 28 that year, Macau gaming revenue in the fourth quarter rose 21.5 percent sequentially (i.e., quarter-on-quarter), and 46 percent judged year-on-year according to data from the Gaming Inspection and Coordination Bureau.
It should also be noted however that January 2007 saw the last and most recent expansion of China’s exit visa system for independent travellers, boosting to 270 million the number of better off mainland citizens eligible to visit Macau.
Academic Carlos Siu Lam of Macao Polytechnic Institute, speaking at a conference in August, said there might be cultural factors at work when a new casino enters the Macau market. He said Chinese tourists that might not otherwise gamble are sometimes willing to “test their luck” when a new venue opens.
Those more sceptical of the current likely influence of new casino supply, point out that the present political and macroeconomic conditions in China and Macau are quite different from 2007, given the mainland’s continuing corruption crackdown and China’s soft housing market.
A number of analysts are however expecting a pick up in GGR in the second half of 2015. That would coincide with the openings – possibly in mid-year – of Galaxy Macau Phase 2 and Studio City.
But some say that the Macau GGR decline seen in December is indicative of political and macroeconomic challenges that could extend well into next year.
Daiwa said, referring to the December GGR data: “The latest set of numbers underpins our view that the new supply in 2015 may not create incremental demand in this macro climate.”
Daiwa added: “We continue to prefer operators with more defensive cost profiles,” and named SJM Holdings Ltd and MGM China as examples.
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”Assuming that our [Tigre de Cristal] phase two project and the other future operators’ development plans remain on track, we may see the benefits of a ‘cluster’ effect [in the Primorye Integrated Entertainment Zone] as early as 2021”
Summit Ascent, lead developer of Tigre de Cristal