Anti-graft uptick, credit clouds Macau growth: Bernstein
Anti-corruption activity in China has “escalated significantly in recent months” and “could have implications on premium spend,” including VIP gambling in Macau, says a report from brokerage Sanford C. Bernstein and Co LLC.
The institution thinks year-on-year expansion of Macau VIP gross gaming revenue might moderate in the final four months of the year – driven by factors including the anti-graft campaign in the mainland and tightening liquidity in China’s economy.
“Year to date though August, VIP is up 25 percent,” stated the brokerage in a Friday report, citing unofficial industry data. The official market split between Macau VIP and mass is only issued by the local gaming regulator on a quarterly basis, with the next set of data due in October, for the period up to the end of the third quarter.
“We forecast the liquidity bump to fade as Chinese credit tightens, money supply growth slows and real estate pricing softens,” said the report authors, adding, “we estimate that VIP for the rest of the year may be up 4 percent to 6 percent.”
While accumulated Macau GGR was up 19.1 percent in the eight months to August 31, the brokerage estimated there would be an “8 percent to 9 percent year-on-year increase for the rest of the year”.
The mainland’s ongoing anti-graft drive contributed – said a range of investment analysts at the time – to the 26-month streak of year-on-year decline in market-wide casino GGR in Macau, between June 2014 and July 2016, inclusive.
Subsequently, year-on-year percentage growth in Macau VIP gambling had surpassed that in the mass segment since March 2017, noted the Sanford Bernstein team working on the brokerage’s latest report on the topic.
“This has not happened in Macau since mid-2009 to mid-2011 – a VIP growth period strongly driven by excess [capital] liquidity in China,” it added.
The sources of such liquidity have included money supply growth, an uptick in real estate pricing and valuation, and expansion of total social financing (TSF), said the brokerage.
TSF in the Chinese context is an economic barometer established by China’s central government. It sums up total fundraising by Chinese non-state entities, including individuals and non-financial corporate organisations.
Graft’s price
“At this point heightened anti-corruption activity feels more ‘fly in the ointment’ than an outright red flag,” said the authors.
“But the change of direction in our data feels noteworthy – especially in the context of increasingly bullish investor views, heightened earnings expectations, and valuation multiples which have expanded,” said the institution, referring generally to its coverage of Macau gaming and of China’s luxury car sales segment.
“Following a long period of moderation that began in early 2016; 2017 since early spring has seen the biggest sustained pick-up in anti-corruption activity since 2014, as several high-profile senior politicians have been placed under official investigation,” said Sanford Bernstein, citing public statements by China’s Central Commission for Discipline Inspection – the anti-graft body overseeing the conduct of members of the ruling Communist Party – and proprietary research.
The brokerage said that between 2014 and 2016 the volume of party anti-graft investigations announced per month fell from “frequently over 50” to fewer than 20. But it added that in the first eight months of 2017 a total of 181 fresh investigations was accumulated, “including 156 in the past six months since March”.
The uptick had also been characterised by probes into “ministerial-level and central-government officials,” with 14 such announced between June and August, said the brokerage.
Sanford Bernstein said July had additionally seen a 50 percent year-on-year increase in announcements of probes regarding President Xi Jinping’s “Eight-point Regulation of the Centre,” a set of general rules for party members’ conduct.
“As analysts covering sectors whose fortunes are closely tied to consumer sentiment and attitudes towards conspicuous spending (and not that long ago were severely impacted by heightened anti-corruption activity…), we feel a responsibility to highlight the recent developments,” said the Sanford Bernstein team.
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