Deutsche Bank Securities Inc says market fundamentals in Macau’s casino sector have yet to post a significant improvement to justify a bullish outlook on the sector.
The comment, by analysts Carlo Santarelli and Danny Valoy, was made in a Wednesday note on Wynn Resorts Ltd. The latter is the parent company of Macau-based casino operator Wynn Macau Ltd.
Mr Santarelli and Mr Valoy changed their recommendation on Wynn Resorts from ‘Buy’ to ‘Hold’, following a year-to-date stock price increase of about 40 percent. The rationale behind the downgrade was mostly related with concerns regarding the Macau casino industry performance.
“Macau fundamentals… are merely less bad, but haven’t truly improved ahead of a mid teens supply growth over the next two years and negative visitor volume trends in a market that is becoming more mass revenue reliant,” the Deutsche Bank analysts noted.
Casino resort launches due in Macau in the next 12 months include: Wynn Palace (pictured), by Wynn Macau; the Parisian Macao, from Sands China Ltd; and MGM China Holdings Ltd’s MGM Cotai. Each is likely to receive 250 new-to-market live gaming tables from the Macau government, according to several analysts covering the gaming sector.
Casino gross gaming revenue (GGR) in Macau has fallen year-on-year for 22 months in a row, linked – say a number of investment analysts – to factors including China’s anti-graft campaign and the softening mainland economy.
“Since June 2015, and excluding the holiday months of October and February, average daily GGR has trended at around US$73 million per day. This is encouraging given the potential for positive year-on-year comparisons is evident as we move into the summer months,” Deutsche Bank’s note said. Average monthly GGR in the second half of 2015 was lower than in the first six months of that year, according to official data.
The Deutsche Bank team however added: “While GGR growth is likely to continue to boost sentiment, we think it is important to remain cognisant of the impact new supply is and will continue to have on the market as it pertains to EBITDA [earnings before interest, taxation, depreciation and amortisation] margins, in a flat to no growth environment, and on returns on invested capital. Said differently, we think there is considerably more to the Macau stories than simply the direction of the top line.”
In a Tuesday release, Fitch Ratings Inc also warned the 2016 opening of two more casino resorts – Wynn Palace and Parisian Macao – in the Cotai district would lead to some “cannibalisation” of business between gaming operators and between individual properties in the city.
The number of visitor arrivals to Macau has also been declining. In the first two months of 2016, the city recorded 5.1 million visitor arrivals, down by 1.0 percent in year-on-year terms.
“If visitation trends were more encouraging, as the market continues to transition to mass, we believe more optimistic mass forecasts could be rationalised, but relying on sharp accelerations in spend per visitor or a dramatic change in visitor volume seems challenging at this stage,” Mr Santarelli and Mr Valoy wrote in Wednesday’s note.
“In short, we don’t think much has changed with respect to gaming fundamentals in Macau since… mid January,” the analysts stated. “Broader macro concerns have abated a bit, as have concerns around currency devaluation, but gaming fundamentals have been largely as expected through the first quarter in 2016.”
Mr Santarelli and Mr Valoy however noted “bad Macau market news is getting swept to the periphery”. They added that, “if this continues, shares could grind higher”.
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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