Macau mass gamblers not making up for absent VIPs: DB
A decline in gaming spend by Macau mass market visitors is a worrying trend that could worsen in coming years, says a note from Karen Tang of Deutsche Bank AG.
The notion of a resilient mass market segment in Macau gaming – as China’s middle class grows – has been seen by some investors as a likely hedge against the politics and volatility associated with the VIP market.
Macau is currently promoting itself – via channels including Macau Government Tourist Office – as a “world centre of tourism and leisure”.
Ms Tang says some data indicate the city’s current heavy reliance on tourists from mainland China for its earnings. “Not only is spend per visitor falling, Macau’s visitor arrivals had also fallen 4 percent year-on-year in the first quarter of 2015, [the] worst decline since [mainland] visa restrictions in 2008-09,” she wrote on Tuesday.
“Disappointingly, the weakness was most pronounced for overnight visitors (-10 percent year-on-year),” Ms Tang added.
Rob Goldstein, president and chief operating officer of Las Vegas Sands Corp, and also interim president of its Macau unit Sands China Ltd, has said in investor presentations that there is a positive correlation between a tourist’s choice of casino-hotel accommodation and how much they spend on gaming and other in-house entertainment and leisure.
Demand shift
Many industry observers had assumed that most of the recent woes in Macau were linked to mainland politics – in particular the crackdown on official corruption in China – and that Macau casino market conditions would improve if policies were relaxed. Ms Tang indicated in her note on Tuesday that some of the fall in demand might be turning structural, as some well-heeled Chinese travellers find other places for entertainment and leisure.
“Player mix [has] deteriorated as high-end premium mass now prefer to spend holidays abroad,” she stated, referring to a market segment of players that don’t qualify as VIPs but nonetheless spend large amounts per session via cash bets.
Market wide, mass gaming spend per visitor in Macau fell 14 percent year-on-year in the first quarter, said Ms Tang.
“We learnt that average table limits on Macau’s mass gaming floors had fallen circa 30 percent since the peak in the third quarter of 2014,” said Ms Tang, citing the bank’s proprietary monthly research on Macau table economics.
Meanwhile casino operators in other regional markets – including Australia, the Philippines and Cambodia – have reported signing new agreements with Macau VIP gaming promoters. The implication is that some of the promoters’ players now prefer to do their gambling outside Macau.
As an example of the current atmosphere of gloom and suspicion surrounding the Macau high stakes segment, it was reported on Tuesday by the Beijing Evening News that China’s second most wanted fugitive Li Huabo – a former government finance official in Jiangxi province who fled the country after allegedly stealing RMB98 million (US$15.8 million) – lost nearly HKD34 million (US$4.4 million) gambling in Macau.
Macau’s tall tax rate on casino gambling – an effective 39 percent of the gross – also creates opportunities for operators in other markets with lower tax rates to compete with Macau for Chinese VIP players. Regional casinos can do that by sharing some of the superior margin with junkets and players in the form of incentives, casino executives have told GGRAsia.
Kenneth Fong and Isis Wong of Credit Suisse AG said in a note on Tuesday there were a number of negative factors currently for Macau, including “policy and poor China macros that drive weaker demand”.
They also noted: “Suncity, Macau’s biggest junket, just opened VIP rooms in [the] Philippines last week. Near term, they may shift further business to this new outlet, further hurting Macau demand, in our view.” That was a reference to reports that Suncity Group Ltd last weekend launched a VIP gambling operation at City of Dreams Manila, a casino resort in the Philippines capital that is run by Melco Crown Entertainment Ltd.
Challenging consensus
Ms Tang of Deutsche Bank said in her Tuesday note referring to the new properties due to open on Cotai, Macau: “We maintain ‘underweight’ on Macau as we do not ascribe to the consensus view of ‘supply drives demand’.”
The first of the Macau newcomers is Galaxy Macau Phase 2, due to launch on May 27.
Deutsche Bank added that according to its research, Macau’s mass-market yield per table in the first quarter fell 6 percent quarter-on-quarter to US$10,100 per day, which it said was 22 percent below the first-quarter 2014 peak.
“We forecast that Macau’s mass table yield will fall another 30 percent by 2017 as supply outstrips demand,” she added.
A selection of investment analysts expect May gross gaming revenue (GGR) in Macau to fall by between 34 percent and 39 percent year-on-year, based on unofficial industry returns through to May 10 inclusive. Some also note the likely structure of the May numbers.
“Both VIP/mass [are likely] sequentially weakening in the second quarter versus the first quarter,” wrote Anthony Wong and Angus Chan of UBS Securities Asia Ltd. “We estimate mass revenue in May to drop 20 to 25 percent year-on-year, and VIP revenue to drop 42 to 47 percent year-on-year,” they added.
“We believe there have been no clear signs of sequential demand recovery, which is assumed in current consensus forecasts,” the UBS analysts warned.
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