The decline in Macau gaming demand is broad-based and some evidence is that mass market gross gaming revenue (GGR) fell year-on-year for all the city’s six gaming operators for the third month in a row in April, said Wells Fargo Securities LLC.
Overall mass GGR dropped for the seventh consecutive month, it added.
“All operators saw mass revenues drop for the third month in a row; junket volume growth continued to decelerate for the 12th straight month; and slot revenues remain weak (down 21 percent year-on-year) suggesting the downtick in revenues is broad based,” stated Cameron McKnight, Rich Cummings and Tiffany Lee in a Wednesday note, quoting unofficial industry returns. The Macau gaming regulator only gives the breakdown between different games and different market segments on a quarterly basis.
The Macau government on Monday announced that market wide GGR for April fell 38.8 percent year-on-year to MOP19.17 billion (US$2.40 billion).
Daiwa Securities Group Inc analysts Jaime Soo and Adrian Chan said in a note on Wednesday they estimated mass-market GGR for April fell 32 percent year-on-year, or 27 percent allowing for some reclassification of mass-market tables to VIP by some operators in order to allow patrons to smoke at the table. They said the decline meant the mass monthly GGR tally was the lowest since December 2012, while the market’s VIP rolling chip turnover was the lowest since January 2010.
Other analysts suggested that – as the Macau operators work to maintain their margins in the face of factors including rising local labour costs and deceleration in growth of the most profitable mass market sectors – new market risks are added to the equation.
Kenneth Fong and Isis Wong of Credit Suisse AG said in their commentary on April GGR: “Direct VIP volume increased in composition, which in turn may increase the casinos’ bad debt risk.”
That is a reference to the fact casinos can improve their margins on high rollers by managing them via the house and issuing them with credit directly. But to do so they must take on the credit risk normally shouldered – in the case of the Macau market – by government-licensed VIP gaming promoters, commonly known as junkets.
But even the Macau junkets – that usually rely on sub-agents that make it their business to know in great detail the credit profile of the high value players they recruit – are growing more cautious in the current market, suggests Credit Suisse.
“On the ground, we hear that the major junket consolidation has largely been over but that among smaller scale junkets [is] ongoing. Junket liquidity remains tight and agents are cautious in extending credit to players,” said Mr Fong and Ms Wong.
They added: “With mass revenue decline accelerating, margin trend could further worsen in 2Q.”
Casinos typically need to spend smaller amounts on incentives to recruit and retain mass-market players, and therefore their play is usually more profitable for the house.
Japanese brokerage Nomura expressed “concern” in a note on Monday that Macau’s daily GGR run rate had been trending downward to MOP650 million “for the last several weeks”.
“The downward slope of Macau’s GGR has begun to flatten, but our concern is that when Galaxy and MPEL open this year, demand will not lift sufficiently to match supply, placing even greater pressure on same-store revenues and margins,” wrote Harry Curtis, Kelvin Wong and Brian Dobson, referring to Galaxy Entertainment Group Ltd’s HKD19.6-billion (US$2.5-billion) Galaxy Macau Phase 2, due to open on May 27, and Melco Crown Entertainment Ltd’s majority-owned US$3.2-billion Studio City casino resort, due to launch in the third quarter.
“Opening of Galaxy Macau Phase 2 is the short-term catalyst in sight given the usual practice of additional credit extending to new VIP rooms at initial operations. Yet, this is unlikely to be significant for the industry as a whole, in our view,” noted Mr Fong and Ms Wong of Credit Suisse.
Union Gaming Research LLC said in a Wednesday note from Christopher Jones and John DeCree in the U.S. and Grant Govertsen in Macau, that year-on-year comparisons on Macau GGR become easier from June. That month in 2014 marked the start of the city’s decline in GGR, when the aggregate contracted by 3.7 percent
“This marks the real transition for GGR comparisons in Macau, as they continue to moderate through the back half of 2015,” noted the Union Gaming team.
Morgan Stanley Asia Ltd said in a note on April 28 that current valuations of Macau gaming stocks were “not compelling” and warned of likely dividend cuts.
“Based on our revised  earnings, the industry is trading at 15.6x enterprise value/EBITDA, 21.2x price to earnings ratio and 5.4 percent recurring free cash flow yield,” said Praveen Choudhary, Alex Poon and Thomas Allen.
“We see dividend cuts in proportion to earnings decline in 2015,” added the Morgan Stanley team.
On April 28, Wynn Resorts Ltd, parent of Wynn Macau Ltd, said it was cutting its quarterly dividend by two-thirds after moving to a loss for the first three months of 2015. Its net profit in Macau fell 59 percent year-on-year.
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”We expect Okada [Manila] to add US$1.2 billion of GGR by 2019 to the overall market, capturing 32 percent market share”
Alex Poon and Praveen Choudhary
Analysts at Morgan Stanley