The second quarter of 2016 was likely to be the “worst quarter in the last five years” in terms of operating results for Macau casino firms, said a note on Monday from banking group Morgan Stanley. Earnings reporting season is due to start soon.
“Weak second quarter revenue is well understood, but will result in negative earnings revisions for 2016,” stated analysts Praveen Choudhary, Alex Poon and Thomas Allen.
The institution said that second quarter casino gross gaming revenue (GGR) of MOP51.6 billion (US$6.5 billion) in the Macau market – down 8 percent quarter-on-quarter and 9 percent year-on-year – “came in below consensus”.
The Macau government is due shortly to publish the numbers regarding the split in second-quarter GGR between the generally lower-margin but traditionally high volume VIP gambling, and the higher-margin but traditionally lower volume mass-market play.
Morgan Stanley gave its own insights on the likely weighting of the market in the second quarter.
“Thankfully, most of the downside came from VIP, which fell 12 percent quarter-on-quarter and 20 percent year-on-year. Yet, negative operating leverage would mean margin disappointment and negative earnings revisions. Mass revenue showed its first year-on-year increase, but on a sequential basis, the 4 percent quarter-on-quarter decline is the worst in the last four quarters,” stated the Morgan Stanley team.
The bank expects Macau casino industry earnings before interest, taxation, depreciation and amortisation (EBITDA) to decline 6 percent quarter-on-quarter to US$1.3 billion, compared to the 3 percent sequential decline seen in the first quarter set against the fourth quarter 2015.
Morgan Stanley estimates second-quarter industry property EBITDA will fall 7 percent quarter-on-quarter, and 4 percent year-on-year, to US$1.4 billion.
The institution said positive trends for the second quarter included the fact the average length of stay for Chinese overnight visitors “remained high” at 2.2 nights, which it noted was a 4 percent year-on-year improvement.
Negative trends for the period included a 3-percent depreciation since April of China’s currency, the renminbi. The currency has experienced an 8-percent depreciation since August 2015, said the bank. Casino bets in Macau are mostly denominated in the Hong Kong dollar, a currency pegged against the U.S. dollar.
Looking ahead to the likely Macau industry numbers for the whole of July and what they might portend for the second half of 2016, investment analysts have a range of ideas focusing on different modes of comparison.
Some analysts highlight the possibility that July will see a year-on-year easing in the rate of monthly decline for casino revenue.
The most upbeat assessment on GGR performance with respect to early July came from David Katz and Brian Davis of Telsey Advisory Group.
“According to our industry sources, based on gaming play for the first 10 days of July, GGR in Macau for the month is estimated to be tracking up approximately 8.2 percent year-on-year,” they wrote in a Monday note.
“This assumes an electronic game estimate for July, [and] puts monthly GGR at HKD19.6 billion [US$2.5 billion],” they added, but noted there are not yet any “indications of impact from variability in hold percentage”.
They added: “We maintain a careful eye on the data flow for meaningful trends rather than anomalies.”
Japanese brokerage Nomura noted on Tuesday: “As we move into the later part of July, we expect the gaming revenue run-rate to improve as the European [soccer] Championship has come to an end, and [as we are] moving into the summer holidays.”
Nomura added that in its view, July had experienced a “soft start” which – even with some uptick in average daily GGR for the rest of the month – could result in a year-on-year decline of between 7 percent and 13 percent, and a month-on-month improvement of 2 percent to 9 percent.
Brokerage Sanford C. Bernstein Ltd’s analysts Vitaly Umansky and Clifford Kurz said in a Monday note: “Assuming an ADR [average daily rate] of MOP550 million to 600 million for the remainder of this month, July GGR would be MOP16.8 billion to MOP17.9 billion, representing a year-on-year decline of 4 percent to 10 percent versus an 8.5 percent year-on-year decline in June.”
Credit Suisse AG analysts Kenneth Fong, Isis Wong and Lok Kan Chan stated in their Monday note that while a “seasonally stronger summer holiday” performance in the Macau casino market might tempt investors to “bottom fish”, the “key for a healthy recovery is an improvement in demand even in slower seasons”.
They added: “Over the past two years, Macau sees a significant change in player mix – fewer high-end and hard-core gamblers. With more leisure players, the revenue is decent in weekends and high seasons but much slower in the down time.”
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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