A likely further depreciation of China’s currency against the U.S. dollar during 2016 would add to the headwinds for the Macau casino industry, says a report from brokerage Daiwa Securities Group Inc.
Daiwa’s chief economist, Kevin Lai, expects a 20 percent-plus decline in China’s renminbi (known as RMB, but also referred to as the yuan or CNY) between now and the end of 2016, said the brokerage. It would comprise an aggregate 7.3 percent drop against the U.S. dollar in 2015 (announced in increments by the country’s central bank) and a further circa 14 percent drop in 2016.
Macau casinos mostly denominate bets in Hong Kong dollars, a currency pegged to the U.S. dollar.
“For Macau, we believe potential sustained CNY weakness would directly impact mass-market customers by way of reducing customers’ Hong Kong dollar-denominated gaming wallets,” stated Daiwa’s gaming industry analysts Jamie Soo and Adrian Chan.
“For the VIP segment, we see such currency weakness resulting in: 1) a reduction in VIP gaming appetite; 2) an increasing cost of patron debt repayment and; 3) a burgeoning cost of debt for junkets,” they stated.
“The U.S. Fed’s [Federal Reserve's] impending rise in interest rates, which Daiwa forecasts to reach 1.13 percent by the end of 2016 from 0.25 percent currently, would exacerbate liquidity pressures,” by making U.S. dollar-denominated assets more attractive and possibly encouraging capital flight from China, said the analysts.
The currency risk is another page, noted Daiwa, in a catalogue of negative factors likely to to affect the Macau gaming market during 2016. These include: changes in regulations governing Macau junkets; deterioration in the China property market, where assets are commonly pledged to junkets by players or by junkets to casinos in exchange for credit; a cap on the amount that can be withdrawn annually using the China UnionPay Ltd electronic transfer system; and no sign of an end to China’s anti-graft campaign that began to ramp up in 2014.
Below consensus for 2016
The brokerage in its Thursday report forecast a 3 percent year-on-year dip in Macau’s mass-market casino gross gaming revenue (GGR) for 2016, and an 8 percent fall in VIP revenue next year, versus what it said was market consensus of mass play growing 10 percent and VIP slipping 7 percent in 2016.
“Sustained junket weakness… will likely put sustained pressure on premium mass gaming volumes and continue to dampen the prospect of a segmental recovery,” said Mr Soo and Mr Chan, referring latterly to casino gambling customers making minimum bets typically in high hundreds or even thousands of Hong Kong dollars but for cash rather than on credit, in the manner of traditional VIP players.
“This deterioration in premium mass performance is unlikely to be offset by a relatively better-performing grind mass segment, which typically consists of smaller betting clients who are unable to drive dramatic GGR growth,” they stated.
“Since mid-October, UnionPay jewellery/pawnshops have seen major disruptions to Hong Kong dollar cash withdrawal services. This impairment of capital availability comes at a time of declining visitor numbers and spending power by the premium mass players,” noted Daiwa.
“We believe these developments will have a direct negative impact on new player acquisitions, which have largely been achieved through referrals in the past,” stated the Daiwa team.
In September, mainland Chinese media reported that China’s State Administration for Foreign Exchange – also known as SAFE – announced new annual limits on automated teller machine (ATM) cash withdrawals made outside mainland China using UnionPay-enabled bank cards.
According to the reports, with effect from January 1, 2016, each UnionPay-enabled card will have a new, annual, cash withdrawal limit at overseas ATMs of RMB100,000 (US$15,714). Prior to that, with effect from October 1, 2015 until December 31, 2015 there is a RMB50,000-per-card ATM cash withdrawal limit, it was additionally reported.
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"The [Macau] government has a lead in this subject in regards to what should be done after the [gaming] concessions expire. We will be first listening to what the government will say”
Ambrose So Shu Fai
Vice-chairman and chief executive at Macau casino operator SJM Holdings