The adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) of Macau’s gaming industry could turn negative in the current and next quarter “for the first time in three years”, with no near-term positive catalyst in sight, JP Morgan Securities (Asia Pacific) Ltd noted on Monday.
“For the first time in three years, we forecast industry EBITDA to print negative growth both quarter-on-quarter and year-on-year in the first quarter to second quarter of 2019, driven not only by anaemic GGR [gross gaming revenue] momentum (expected), but also by relatively soft margins (lesser-known),” said the institution’s analysts DS Kim and Sean Zhuang in a Monday memo.
The brokerage added that Macau gaming industry margins had deteriorated sequentially in the past three quarters, despite “higher top-line” earnings and improved revenue mix including a greater proportionate contribution from mass-market gaming and from non-gaming revenue.
“The impact of rising operating expense could be felt more acutely this year, where top-line growth will likely slow materially to flat to negative (versus +14 percent in 2018),” the JP Morgan analysts noted.
The stockbroking arm of JP Morgan also said it did not expect a positive surprise in Macau’s GGR in the near term, noting that the growth comparison of March and April for that indicator was “very tough given unfavourable calendar year-on-year”.
They noted that junket operator spring dinners for clients – seen by the investment community as typically times when VIP play volumes rise – had been held in February this year versus March last year. That was a function of 2018′s relatively late Chinese New Year, a festival decided by the lunar calendar. JP Morgan additionally stated that the holiday season for the springtime Labour Day break – officially May 1 – had effectively started on April 29 last year – a Sunday – versus May 1 this year – which will be a Wednesday.
Industry first-quarter earnings, expected from late April onward, “could print negative growth (albeit small) for the first time in three years”, stated the brokerage. ” We sense that a short-term breather is coming for Macau stocks,” the Monday note added.
Macau’s casino gross gaming revenue rose by 4.4 percent year-on-year in February, to MOP25.37 billion (US$3.14 billion), according to the latest official data released by the city’s Gaming Inspection and Coordination Bureau. The latest monthly result puts the market’s accumulated 2019 year-on-year decline at 0.5 percent, or MOP50.31 billion. January casino GGR registered the first year-on-year monthly decline since 2016.
The JP Morgan analysts kept their full-year Macau GGR forecast unchanged at “-1 percent”, with growth to recover in 2020. “We keep our industry GGR assumptions unchanged at -1 percent for full-year 2019, with +5 percent growth in mass, versus – 7 percent decline in VIP,” the analysts stated.
“We assume GGR growth will recover in full-year, led by +9 percent in mass and +7 percent in VIP, amidst the opening of SJM’s Grand Lisboa Palace (and to a lesser degree Galaxy Macau Phase 3),” the analysts noted.
They were referring first to a Cotai project from SJM Holdings Ltd due to be completed this year according to company commentary, and second to an extension to Galaxy Entertainment Group Ltd’s Cotai flagship. Phase 3 is likely to open in stages “starting from mid-2020” said a senior company executive last week.
In its Monday note, JP Morgan said it had turned “less bullish” on Macau gaming, as it believed that further potential share price “upside” was “no longer sizeable enough” for the institution to stay “outright bullish”.
“After the recent rally, the sector now trades at 13x enterprise value/EBITDA (or 12x forward), right at its historical average,” said Mr Kim and Mr Zhuang.
They added: “We believe the market will be hard pressed to ascribe a meaningfully higher multiple than this, given rising ‘risk perception’ on concession renewal toward the expiry in 2022, as well as ongoing macro uncertainties and cyclical headwinds,” the banking group’s analysts wrote.
They were referring to a likely new public tender process for Macau gaming rights when the six current licences expire on various dates in either 2020 or 2022. The analysts further noted that concerns about China’s capital export control measures were also a factor to consider.
The brokerage said it still was positive on the long-term prospects for the Macau casino sector, supported by the “structural story of mass” play, infrastructure development, and what they termed the “potential” of the Guangdong-Hong Kong-Macau Greater Bay Area. the latter is a Chinese central government initiative to integrate the economy and people of mainland China’s Guangdong province with the economies of Macau and Hong Kong.
Nonetheless the analysts added regarding the short-term outlook for Macau: “[We] would thus start gradually taking profits (except for ‘overweight’ names) and await a ‘healthy breather’ before re-entering.”
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