The United Kingdom’s referendum vote on Thursday to leave the European Union – an event referred to as ‘Brexit’ – has the potential to be a negative for Macau casinos in terms of movements in foreign currency exchange markets, says a note issued on Monday by JP Morgan Securities (Asia Pacific) Ltd.
“The [U.S.] dollar’s strength post Brexit places risk for the RMB [renminbi, China’s currency] to depreciate further (negative to overall demand), which in turn may also lead the Chinese government to introduce tighter capital control measures (negative to premium mass and VIP [casino] demand),” said the note from JP Morgan.
Although the Macau government reports its casino gross gaming revenue (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 directly pegged to the U.S. dollar.
“We estimate that every 1 percent depreciation of the RMB against the H.K. dollar would reduce the [Macau] industry’s GGR by 0.8 percent to 0.9 percent and EBITDA [earnings before interest, taxation, depreciation and amortisation] by about 1 percent,” stated the JP Morgan team.
The note added that foreign exchange played a “relatively small role in ASEAN casinos” – a reference to casinos in countries that are members of the Association of Southeast Asian Nations. Of the 10 member nations of ASEAN, six – Cambodia, Laos, Malaysia, the Philippines, Singapore and Vietnam – have legal casinos.
JP Morgan wrote: “Foreign exchange plays a relatively small role in ASEAN casinos, because: (a) their exposure to Chinese/Japanese/Korean gamblers remains relatively small, at about 20 to 30 percent of Philippines gaming revenues and 30 to 40 percent of Genting Singapore [Plc]’s according to our estimates; and (b) currency movements within ASEAN countries (which explains the rest of non-local demand) tend to move together, offsetting the net impact to their businesses.”
Genting Singapore operates Resorts World Sentosa, one of Singapore’s two casino resorts.
Genting’s U.K. business
The JP Morgan note said that the only casino operator in Asia with “meaningful exposure” to the U.K. and Europe was Genting Malaysia Bhd, which owns casinos in the U.K. and the United States as well as operating Resorts World Genting in Genting Highlands, Malaysia.
“[Genting Malaysia] generates circa 15 to 20 percent of revenue and circa 10 to 15 percent of EBITDA from U.K. casinos. GBP [British pound] weakness and economic stress in the U.K. would negatively impact its earnings, and our 2016 to 2018 estimate earnings per share would be circa 1 to 2 percent lower if we used current spot foreign exchange rates for ringgit [Malaysia’s currency].”
JP Morgan added that Brexit could actually be a positive – in foreign exchange terms – for South Korean casinos.
“Depreciation of KRW [Korean won] should directly benefit foreigner-only casinos in Korea, because, by definition, 100 percent of their revenues are from foreign gamblers… we estimate every 1 percent depreciation of KRW against the basket of RMB/JPY [Japanese yen]/U.S. dollar would boost Paradise and GKL’s operating profit by 3 to 4 percent and 2 to 3 percent, respectively,” said the bank, referring to Paradise Co Ltd and Grand Korea Leisure Ltd, two of the main operators of foreigner-only casinos in South Korea.
Morgan Stanley Asia Ltd said in a note on Friday regarding Brexit risk for Asian casinos: “Demand from Chinese consumers could be negatively affected by strengthening U.S. dollar, but much less than many other sectors/countries with exposure to Europe, GBP and overall economy.”
“We believe any impact is likely to be minimal, as the gaming industry is driven by domestic Chinese demand. The companies have minimal exposure to EUR [euros]/GBP through either income statement or balance sheet (except for Galaxy, which has HKD359-million [US$46.3-million] of bank borrowings in Euro due to SBM’s investment in Aug 2015),” said the Morgan Stanley team.
The latter was a reference to Macau-based gaming operator Galaxy Entertainment Group Ltd which announced in July last year it was acquiring a 5-percent stake, for EUR40 million (US$44.2 million), in Monaco casino firm Société des Bains de Mer et du Cercle des Étrangers à Monaco, also known as SBM.
“Chinese tourists may travel to Europe (weaker Euro) to buy cheaper luxury products, but they are less likely to find gambling alternatives,” added Morgan Stanley.
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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