Devaluation of China’s currency – the renminbi – is likely to be “manageable” for the U.S.-based Macau casino operators, said a note published online on Monday from investment research and investment management firm Morningstar Inc.
Dan Wasiolek, a senior equity analyst for Morningstar, said that Nevada-based casino firms Wynn Resorts Ltd, Las Vegas Sands Corp and MGM Resorts International – that all have operations in Macau – were forecast to receive respectively 62 percent, 55 percent, and 27 percent of their 2015 earnings before interest, taxation, depreciation and amortisation (EBITDA) from Macau.
“Currency may present a near-term sentiment overhang on the shares, but barring an economic collapse, we see the yuan devaluation as manageable for the Macau operators,” said Mr Wasiolek.
The analyst added it was possible that “further yuan depreciation could result in Hong Kong devaluing its dollar to stay competitive with other countries [sic]”.
Union Gaming Research LLC analysts Christopher Jones, John DeCree and Grant Govertsen had said in an earlier note that since the end of July and up to Saturday, the renminbi – also referred to by some investors as ‘RMB’, ‘the yuan’ or ‘CNY’ – had declined approximately 4.5 percent against the Hong Kong dollar, which Union Gaming referred to as the “primary gambling currency in Macau”.
“As mainland China business accounts for more than 90 percent of Macau’s GGR [gross gaming revenue], it is only logical that depreciation of CNY would have a sustained negative impact on sector GGR, not dissimilar to growth the industry enjoyed during the period of CNY’s increasing strength over the past five years,” stated Daiwa Securities Group Inc analysts Jamie Soo, Adrian Chan and Jennifer Wu in a note on Monday.
Tourists from mainland China made up 65 percent of the approximately 7.34 million visitors to Macau in the second quarter, according to data from Macau’s Statistics and Census Service.
Although the Macau government reports its casino GGR in the territory’s currency, the pataca (also known as MOP), most bets at Macau casinos are denominated in Hong Kong dollars, a currency currently pegged to the U.S. dollar. The pataca is indirectly pegged to the U.S. dollar via an association with the Hong Kong dollar, whereby MOP1.03 is approximately equal to HKD1.00.
“A 1 percent change in the U.S. dollar/pataca exchange rate equals a gain or loss of US$13.7 million for Las Vegas Sands, which is manageable based on our 2016 net income estimate of US$2.3 billion for the firm,” said Morningstar.
Mr Wasiolek said it was not “unreasonable” to expect Macau visitor numbers and casino revenue to “re-accelerate to above a mid-single-digit pace in a few years, as new casinos open in 2015-17 (increasing Macau room supply toward 43,000 from 28,000 currently).”
But he also noted that “the Macau market is highly regulated, and as a result the pace and timing of growth is at the discretion of the government”.
Macau is likely to report in August its second lowest monthly GGR tally since end-2010, said several analysts in notes on Monday.
UBS Securities Asia Ltd analysts Anthony Wong and Angus Chan also mentioned that a poor GGR performance in August might lead the Macau government to introduce previously flagged austerity measures to control public spending.
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"When the gaming concessions expire, the Macau government is inclined to launch a public tender [for new gaming rights]"
Lionel Leong Vai Tac
Macau Secretary for Economy and Finance