Japanese brokerage house Nomura is “significantly” lowering its projected rates of return on invested capital (ROIC) for the upcoming Cotai casino resorts in Macau.
“With Beijing’s insistence on diversifying Macau’s revenues from gaming, we assume 40 percent to 50 percent lower table allocations for the new resorts,” a group of U.S.-based Nomura analysts led by Harry Curtis wrote in a note released on Wednesday.
They added: “Three months ago, we lowered our ROIC forecast from 30-35 percent to around 25 percent. With fewer tables and lower-than-expected gross gaming revenue (GGR) going into the openings, a 15-percent ROIC is more likely.”
Nomura stated it ascribed little incremental EBITDA (earnings before interest, taxation, depreciation and amortisation) for non-casino amenities.
All Macau’s six casino operators are investing billions of U.S. dollars into new projects in Cotai, scheduled to open between 2015 and 2017.
Macau’s two 2015 openings are Galaxy Entertainment Group Ltd’s Galaxy Macau Phase 2 and that for Melco Crown Entertainment Ltd’s majority-owned Studio City. The two projects combined involve around US$5.7 billion in capital spending, and the openings are only months away.
“Until recently, we have held firm in our belief that both Macau and Beijing want the new projects to be successful, albeit at a lower ROIC,” the Nomura analysts stated. “While this conclusion has probably not changed, we now believe that the governments want success, but only if it comes if operators are compliant with visitation and money flow regulations.”
They added: “Project ‘extensions’ like Galaxy’s, while it may ultimately be awarded a handful of tables, warrant minimal incremental gaming capacity since a 1,300-room tower addition does little to diversify Macau’s revenues away from gaming.”
The Japanese brokerage firm is now assuming that the Cotai projects of Wynn Macau Ltd, MGM China Holdings Ltd and Sands China Ltd will only be granted 300, 250 and 200 tables, respectively, “which is 40 percent to 50 percent below their hoped-for allocation”.
On Wednesday’s report, Nomura also sharply reduced its full-2015 GGR growth forecast for Macau. It now expects a year-on-year decline of 18.2 percent after accounting for the openings of Galaxy Macau Phase 2 and Studio City. On a monthly basis, GGR growth as measured in year-on-year terms should only return to positive ground in December 2015.
“There is a new sheriff in Macau and that sheriff is Beijing, which is tightening and enforcing travel and capital flow regulations,” the Nomura analysts wrote.
They added: “Our estimate does not assume new policies restricting either the use of UnionPay cards, the business practices of the jewellery shops in Macau or a full ban on smoking in the casinos. Investors may view our new estimate as too conservative, but the chance of current trends improving in the face of even more regulation/enforcement seems remote.”
