Brokerage Daiwa Securities Group Inc says it is reducing its estimates for 2016 Macau casino gross gaming revenue (GGR) and downgrading the sector.
“We are revising down the sector’s 2016 estimated GGR to -10 percent year-on-year, from -5 percent year-on-year, and expect weakness across all operating segments,” said analysts Jamie Soo and Adrian Chan in a note on Friday.
They added: “We downgrade the sector to ‘negative’, from ‘neutral’, and lower our 12-month target prices as we see further downside risk in the near term.”
It added there were several reasons, including: questions about “the appropriateness” of Macau operators using adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) as a valuation benchmark for their businesses; volatility in the value of China’s currency, the renminbi; “more frequent policy tightening” in relation to the Macau market; and mass gaming margins coming under pressure as market supply expands with new openings during 2016.
Daiwa said the renminbi’s “increasing weakness and volatility” would likely put “further pressure” on Macau’s gaming sector, from players’ gaming budgets to liquidity channels.
Renminbi foreign exchange risk – given that most bets in Macau casinos are denominated in Hong Kong dollars, a currency pegged to the U.S. dollar – had been mentioned in a report published on Thursday by investment bank Morgan Stanley.
Daiwa stated in its Friday note: “By our analysis, the operators’ calculation of ‘adjusted EBITDA’ involves excluding certain cost items: 1) cash costs, 2) recurring in nature, and/or 3) business-related. As such, we contend that its use as a profitability benchmark understates the expensiveness of the stocks.”
The brokerage added: “These non-GAAP [generally accepted accounting principles] metrics are defined independently and comparing them to assess relative profitability is not a fair ‘apples-to-apples’ comparison.”
Mr Soo and Mr Chan further stated with regard to Macau: “Stabilising mass revenue is still uncertain, given falling room/occupancy rates, and a decline in the quality of mainland visitors.”
Daiwa said it expects VIP gaming revenue to fall by 12 percent year-on-year in 2016, up from a previous forecast of an 8 percent decline. The mass segment GGR is expected to fall by 3 percent year-on-year, said the brokerage.
The Daiwa team said it expects Macau gaming sector’s overall GGR to show a 4 percent year-on-year increase in 2017, and 5 percent growth in 2018.
A note on Wednesday – giving some commentary on Macau’s May casino GGR numbers – from Karen Tang, an analyst at Deutsche Bank AG in Hong Kong, also discussed the “quality” of Macau’s visitors.
She wrote: “Looking ahead into July and August, we noted many hotels started offering discounted rates to lure family travellers over the summer holidays. This reaffirms our view that Macau fails to attract higher-end visitors.”
May’s casino GGR result meant Macau casino revenue had on aggregate declined 11.9 percent year-on-year in the first five months of 2016.
On the topic of public policy, brokerage Union Gaming Securities Asia Ltd had mentioned in a note on Friday that the China National Tourism Administration (CNTA) had reiterated a previous warning to Chinese tourists about avoiding “bad behaviours”, including “gambling”.
“In our view, this does not represent any real incremental risk to Macau’s current GGR story,” the brokerage had said, adding that “the CNTA is just doing its part to talk tough as it relates to the ongoing anti-corruption/anti-extravagance campaigns,” in the country.
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Alex Poon and Praveen Choudhary
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