Part of the problem in analysing the sustainability of Macau and its gaming segments is not a lack of data, but a lack of specific types of data, mentions a new report on Thursday from brokerage Sanford C. Bernstein Co LLC.
“Macau may be the ultimate China data sufficiency problem,” stated the report, prepared by a Bernstein team headed by strategist Michael Parker and senior analyst Vitaly Umansky. “We have enough data (US$44 billion in GGR [in 2014]) to know that Macau is systemically important. However, we do not have enough data to categorically dismiss many of the anecdotes that get thrown around about Macau.”
The report added: “There are only something like two million ‘[U.S. dollar] millionaire households’ in China. It is possible that individuals from approximately 6 percent of China’s millionaire households (around 120,000 VIP players) lost up to 20 percent of their net worth to Macau casinos in 2014. However, that business model simply is not sustainable. That 120,000th richest VIP, by virtue of losing ~US$200,000 each year in Macau, is not going to be a millionaire for long.”
Sanford Bernstein suggested that – contrary to some other recent commentary from investment analysts – the future of Macau will be a story of fresh supply creating fresh demand: but in the mass market rather than VIP and premium mass segments.
“The new Cotai casino projects (with an additional 11,000 hotel rooms coming through 2018) are exactly what Macau needs to continue to transform itself into a regional tourist destination,” said Sanford Bernstein.
“We believe the increased supply will cross incremental demand, particularly the demand that was previously kept away by HKD1,000+ [US$129+] minimum table bets and HKD2,500+ per night hotel rooms in Macau,” added the Bernstein team.
In the shorter term however, analysts at Daiwa Securities Group Inc still question the ‘supply drives demand’ thesis in Macau.
“The subdued response to Galaxy Macau Phase 2’s opening in May 2015 has finally put to rest the “build and they will come” myth,” wrote Jamie Soo, Adrian Chan and Jennifer Wu in a note on Tuesday.
“From what we have seen on the ground in Macau, the market continues to underestimate the impact of liquidity constraints, Chinese yuan depreciation, cost inflation and negative operating leverage,” added Daiwa, referring to another name for China’s currency, the renminbi. Daiwa’s revised Macau forecasts, which it says are 11 percent below the Bloomberg consensus numbers, foresee Macau’s 2015 sector-wide earnings before interest, taxation, depreciation and amortisation falling by 40 percent year-on-year – versus a 27 percent fall in previous estimates.
Mass struggles short-term
Further commentary on the short-term challenges in Macau of the mass-market story was provided by Japanese brokerage Nomura in a note on Thursday.
Analysts Richard Huang and Stella Xing noted that Galaxy Entertainment Group Ltd had not been able to convert its increased visitor traffic at the Galaxy Macau complex – following Galaxy Macau Phase 2 and Broadway Macau’s opening on May 27 – into gaming spend.
“Galaxy has not effectively converted these footfalls into gaming revenue as VIP/mass revenues were still down… quarter-on-quarter, despite the opening of Phase 2. The only segment that enjoyed an uptick was the slots segment, which recorded a 19 percent quarter-on-quarter rise in revenue,” the Nomura team noted, referring to Galaxy Entertainment’s first half results published on Wednesday.
Sanford Bernstein’s Thursday report aimed at a longer-term view of the Macau market, though noted that China’s anti-corruption campaign has not yet started to unwind, as some analysts have hinted.
“The campaign still shows limited signs of tapering. In our view, the anti-corruption climate could continue beyond late 2015 and remain a headwind. However, we view the campaign itself as changing and becoming more centralised and less ad hoc,” Sanford Bernstein added.
“Local anti-corruption investigations (previously often under the purview of local party bosses) are being taken away from local party chiefs and centralised under authority in Beijing,” said the brokerage regarding mainland China’s anti-graft drive.
Sanford Bernstein added that high rollers and high limit players are a varied bunch, with different sources of wealth and different motivations for playing in Macau.
It divided them into private business owners with a high propensity to gamble; individuals that are tied to government or state-owned enterprises; and private business owners where a significant portion of their wealth comes from corrupt endeavours.
“Individuals in the latter segment have been heavily targeted by the anti-corruption campaign. We believe that most (if not all) of these types of players have already exited the Macau market (and likely will not return),” said the brokerage.
