Japanese finance house estimates that VIP revenues in Macau were down 25 percent month-on-month in February, highlighting the risks for junket operators.
“This was far worse than VIP demand during the Western New Year when GGR [gross gaming revenue] was flat sequentially,” Nomura analysts Harry Curtis, Kelvin Wong and Brian Dobson wrote in a note on Thursday.
“What we found interesting in the February data was the significant shrinkage in VIP demand, despite what turned out to be a strong last week for the Chinese New Year,” said the Nomura research team.
The analysts now expect Macau GGR to fall 25 percent for the whole of this year compared to 2014, “as we see a low probability that government policy changes will reverse”.
The Nomura team stated that as well as the corruption crackdown and weaker business climate in mainland China it now sees a “problem of business model risk at the Tier-1 and -2 junkets”.
“For several years, investors in junket operators have enjoyed monthly returns of 0.5 percent to 1 percent, which has attracted ample capital to fund operations. The problem for many junkets has become ‘issue credit, have trouble collecting the receivable’,” the Nomura trio wrote.
“The upshot is that potential investors in junkets in need of new capital are questioning the viability of a business model where the borrowers have no legal obligation to repay, and when times are stressed, they tend not to,” they added.
Investment analysts have said they expect more junket closures after the Chinese New Year, which first day fell on February 19 this year. That follows the closure of several VIP rooms in January, including rooms operated by David Group and Gold Moon Group.
The Nomura analysts said they assume overall GGR in March “will be fairly flat” compared to February. GGR in February hit MOP19.5 billion (US$2.4 billion), down by 48.6 percent year-on-year.
“But daily win will contract by another 4 percent to MOP670 million because of seasonally lower premium play,” they said. “We continue to expect negative comparisons through December 2015, as well as potentially negative news flow on table allocations, the mid-Mar industry review, and what could be disappointing initial returns from the two new openings on Cotai.”
The Japanese brokerage highlighted also what the analysts said is the critical need for transport infrastructure in Macau. Two of the city’s major transport infrastructure projects are facing further delays.
The first phase of the under-construction Light Rail Transit system, designed to move visitors and Macau locals swiftly around the city, is only expected to be completed between 2017 and 2018. The Hong Kong-Zhuhai-Macau Bridge might also be delayed until 2017, according to recent reports.
“In our view, the bigger issue is the timing of the light rail system on Macau and Cotai,” said the finance house.
“By end-2016, we expect roughly a 40 percent increase in the number of hotel rooms, which should lead to a comparable increase in visitation. Already, there are periods when Macau’s streets and entry points are busting at the seams,” said the Nomura analysts.
“Layering on an additional 120,000 visitors/day will create traffic nightmares, especially for locals already complaining about overcrowded conditions,” they wrote.
The delays, including labour issues, could mean that hotels would be ready to receive guests, but there would be “no efficient way to get them there,” said the brokerage.
“Unless this issue is resolved soon, it is likely to lead to guest dissatisfaction, potentially lower occupancies, lower project ROICs [return on invested capital], and even greater discontent among Macau’s locals, which may lead to much feared social unrest by the government(s),” Nomura added.
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”We do not believe that reopening the advance notice nomination deadline [for board directors] is appropriate or justified”
Daniel Boone Wayson
Chairman of the Wynn Resorts board of directors