Macau’s gaming market is likely to experience a contraction this year before returning to growth in 2020, says a new note from investor services firm Morningstar Asia Ltd.
“Despite fears around a trade war [between the United States and China] and China’s economic slowdown, the narrow-moat Macau gaming market’s competitive positioning and demand remain strong,” wrote analyst Chelsey Tam in a Friday memo.
“We believe the current weak sentiment presents a good buying opportunity for long-term investors,” she said, adding that her firm’s “fair value estimates” assume the gaming licences of the six incumbent operators “will be extended”.
“The risks of more stringent requirements are already captured by our assumption of a 1-percent per year increase in gaming revenue tax for five years as all the licences will be renewed in 2022,” stated Ms Tam.
China’s economy cooled in the fourth quarter, dragging down its 2018 growth to the lowest in 28 years. Fourth-quarter gross domestic product grew at the slowest pace since the global financial crisis, easing to 6.4 percent year-on-year, the National Bureau of Statistics said on Monday. The bureau announced on Monday that the country’s official economic growth came in at 6.6 percent in 2018.
In Friday’s note, Ms Tam said that “as result of weaker consumer sentiment, the trade war, and an economic slowdown in China,” Morningstar expected the Macau market to experience a “cyclical downturn” in 2019.
“We now forecast Macau gaming revenue growth to decline by low single digits in 2019 before returning to growth of low single digits in 2020 and mid single digits in 2021 as the Chinese economy recovers,” wrote the analyst. “We do not expect the gaming sector will see a downturn as severe as 2015 as we have not seen signs of a gaming bubble this time around.”
According to Morningstar, Macau’s VIP revenue is likely to record “high single digits” decline in 2019, recover to a low-single-digit growth in 2021. “In our estimate, mass gaming revenue growth will decelerate to low single digits in 2019 and re-accelerate to high single digits in 2020 and 2021,” said Ms Tam.
Sanford C. Bernstein Ltd had a similar view in a memo issued last week. The brokerage said that Macau’s VIP segment was “likely to continue to face headwinds in the earlier part of 2019, until more promising China macro data and resolution of U.S.-China trade war materialise”.
Morningstar maintained its long-held view that Macau remains an attractive market in the long term. “The opening of Grand Lisboa Palace, Londoner Macao, and Galaxy Macau phases three and four, along with the new resort openings in the past few years, should revitalise [consumer] appeal for Macau and drive gross gaming revenue in the coming decade,” said Ms Tam.
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"The Hong Kong protests may hurt Macau gross gaming revenue by about mid-single-digit (i.e., half of maximum visitation exposure), which should fade away gradually as people will find alternative ways to visit Macau”
DS Kim, Jeremy An and Christine Wang
Analysts at brokerage JP Morgan Securities (Asia Pacific) Ltd