The most recent three-month average number of reported anti-graft investigations in China is the highest since the fourth quarter 2015, and could be one of several factors likely to dampen demand for Macau casino gambling in the remaining months of 2018 and into 2019.
So says a new report issued on Monday by brokerage Sanford C. Bernstein Ltd.
It cited announcements by the Communist Party’s Central Commission for Discipline Inspection – the body responsible for overseeing and investigating China’s party cadres – and the brokerage’s own analysis.
“The most recent three-month average (April [-end] to July) number of investigations is the highest since the fourth quarter 2015. Any re-emerging anti-corruption campaign would bring headwinds to the VIP sector and high-end premium,” wrote analysts Vitaly Umansky, Zhen Gong and Kelsey Zhu. The graph indicated there had been an aggregate of around 115 investigations in the months of May, June and July this year.
In June, coincidentally, it was reported that there had been a clampdown in Macau on the use of unauthorised China UnionPay Co Ltd point-of-sale machines at certain jewellery or pawnshop outlets at Cotai casino resorts, and subsequently a crackdown on unauthorised foreign currency exchange touts in the Cotai district.
The institution presented in graph form in its report, data from April 2013 to July 2018. It showed on the horizontal axis the number of reported graft probes by the party; and on the vertical axis, the growth of Macau VIP gross gaming revenue (GGR) in the same period.
The graph indicated that on several occasions in the snapshot period a spike in Macau VIP GGR coincided with a spike – typically lagging by one or two months – in the number of disciplinary investigations. But during the period from approximately March 2016 up to March 2018, there had been a lull in such anti-graft activity. At that time, according to the data collated by Sanford Bernstein, VIP GGR had improved steadily without any coincidental rise in anti-corruption activity. That scenario might now have changed, suggested the brokerage.
“A renewed focus on anti-corruption is not an unlikely policy initiative,” noted the report authors.
They further observed: “For 2018, we estimate GGR growth of 14 percent (17 percent mass, 11 percent VIP) and industry-wide EBITDA [earnings before interest, taxation, depreciation and amortisation] growth of 21 percent.”
In the first quarter, aggregate Macau GGR had expanded by 21 percent year-on-year, driven by expansion of the high-roller segment.
In the second quarter, the tally of VIP GGR was up 13 percent year-on-year, but down nearly 5 percent judged quarter-on-quarter.
Macau VIP GGR growth in the second quarter was the slowest since the end of 2016, showed data issued in mid-July by the city’s regulator, the Gaming Inspection and Coordination Bureau.
Sanford Bernstein said in its latest report: “VIP deceleration was largely driven by weakness in the overall market, softening macro environment, reduced liquidity and uncertainties around the trade disputes between China and the United States.”
It added there were likely to be “structural headwinds in the latter part 2018 from instituted cooling measures on Chinese real estate, credit tightening in China,” and some depreciation of China’s currency the yuan, versus the U.S. dollar. The latter currency is the one against which the Hong Kong dollar – the main currency denomination for Macau casino bets – is pegged.
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Analyst at Roth Capital Partners