Gross gaming revenue (GGR) at the higher end of Macau’s casino business segment – a customer group known in the North American casino tradition as “whales” – might shrink for six months before returning to growth in the second half of 2019, according to a forecast from the stockbroking arm of Japan’s Nomura finance group.
The forecast for two divergent trends in the mass- and VIP-gaming segments this year is covered in a note published on Monday. It considers investment strategies among the gaming, lodging and cruise line companies covered by Nomura’s Instinet stockbroking division.
Referring to the Macau market the Nomura gaming team wrote: “Consensus expectations are for (7.5 percent) VIP compression in the first half of 2019 and up low single digits in the second half, so there would be upside to estimates (and probably sentiment) if it stays flat or declines only low single digits while mass expands mid- to high-single digits.”
They added: ”Based on November and month-to-date December results, there should be upside to our kitchen sink 2019 (10 percent) VIP estimate” for growth.
The memo, by Harry Curtis, Daniel Adam and Brian Dobson, said year-on-year GGR expansion in the Macau VIP segment had mostly been flat or negative in each of the past six months.
Capital liquidity at three leading junket operators (Suncity Group, Tak Chun Group and Guangdong Group) had been ample, but demand has been “more conservative due to uncertainty given the backdrop of weaker property and stock markets”. Video-streamed casino games available online to consumers via providers in the Philippines had also helped cut into Macau’s GGR, Nomura says.
“Investor concerns intensified in November, when Wynn Resorts Ltd presented its initial pessimistic thoughts on 2019, implying that the premium segment could be down 10 percent to 15 percent,” the analysts further observed, referring to Macau.
“Since then, November GGR rose 8.5 percent (helped by a high hold) and December came in better than expected at plus 16.6 percent. VIP in the fourth quarter will probably be flat, while mass revenues may lift over 15 percent,” they added.
But the team also noted that exposure to stocks in Macau-operating casino companies represented the best mix of risk and reward for investors this year among the gaming, lodging and cruise line companies covered by the analysts.
“The reason for such GGR growth in the face of China deceleration is that Macau is undersupplied like Las Vegas was during the recessions of 1991 and 2001,” the note said. “For 2019, we expect much better stock price performance and multiple expansion for Macau operators with ramping properties.”
Nomura thought there were four reasons for optimism on Macau, particularly in the second half of the year: economic growth in mainland China should stabilise at 6 percent, leading to a lift in VIP and premium-mass player sentiment; GGR growth rates have bottomed out and could resume double-digit growth in the second half; tensions between the United States and China will ease; and the Macau government will offer clarity about the future of the city’s casino concessions.
Macau has registered strong GGR growth since the middle of 2016, the last time a negative monthly GGR growth rate was recorded. Investors would have to look to 2016 for the last time Macau’s annual GGR tally contracted year-on-year.
While most brokerages see a slowing of GGR growth this year, and the consensus is that double-digit growth rates are improbable, annual growth across the entire industry will nonetheless be likely to be between 5 percent and 9 percent, according to some other estimates.
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“We see that basically the ‘golden’ periods [for Macau's casino industry] are all concentrated in the second half of this year”
Lei Wai Nong
Macau’s Secretary for Economy and Finance