GGRAsia – Macau Policy Address likely non-event for investors: DB

Macau Policy Address likely non-event for investors: DB

Nov 16, 2015 Newsdesk Latest News, Macau, Top of the deck

Macau’s Policy Address for the Fiscal Year 2016 – due to be delivered on Tuesday by the city’s Chief Executive, Fernando Chui Sai On (pictured) – is likely to be a “non-event” for investors in Macau casino names, said a note from analysts on Friday.

“Most, including ourselves, expect the tone to be positive, and supportive of the gaming industry,” said the note from Carlo Santarelli and Danny Valoy of Deutsche Bank Securities Inc.

“That being said, we do not believe meaningful changes, that would alter the cadence of gaming revenue, are on the horizon. Accordingly, any supportive commentary towards the industry, in our view, is likely more of a sentiment event for stocks rather than a fundamental change,” stated the Deutsche Bank analysts.

The annual policy address delivered by the city’s chief executive sets out the administration’s programme for the following 12 months, including any initiatives that supplement existing policies.

The city’s casino gaming gross revenue (GGR) monthly tally has fallen for 17 consecutive months, judged year-on-year, since June last year. A number of investment analysts have linked that decline to policy initiatives in mainland China and Macau including greater scrutiny of cross-border money transfers, as well as to macroeconomic factors, including a slowing in the growth of the mainland economy and reduced liquidity in China’s property market. Many high rolling Chinese gamblers in Macau have in the past relied on selling property to cover gambling losses, according to analysts.

Macau’s accumulated GGR for the first 10 months of 2015 stood at MOP196.07 billion (US$24.6 billion), a fall of 35.5 percent compared to the same period in 2014.

Union Gaming Securities Asia Ltd said in a note on October 13 it expected any recovery of Macau gaming revenues to be “policy driven”.

Investment analysts at Credit Suisse AG in Hong Kong in early July said they thought Macau might have reached what they termed a “policy bottom” in terms of initiatives or announcements likely to have a negative affect on Macau gaming operations and investor sentiment. Since then, further policy announcements from the mainland – including new annual limits on automated teller machine (ATM) cash withdrawals made outside mainland China using the China UnionPay Ltd electronic transfer system – have left investors in Macau casino firms wondering about the future for Macau GGR.

On Friday the Macau government announced that Paulo Martins Chan – a public prosecutor who will take over from December 1 as the new director of the local gaming regulator – would have among his tasks the enhancement and strengthening of gaming-related regulations.

“We remain neutral on the Macau names and continue to believe there will be no V-shaped recovery as the liquidity-induced ‘Macau bubble’ of the past five years continues deflating,” said a note on Friday from Cameron McKnight of Wells Fargo Securities Inc.

Five-year plan

The content of the 2016 policy address to be delivered by Mr Chui has not yet been made public. A meeting chaired by the Chief Executive on November 3, set out what he referred to as a five-year development plan for Macau. It included making the city a “world centre of tourism and leisure”. A number of gaming industry analysts have noted that the Macau government wants to shift the city’s tourism focus to mass-market entertainment – especially non-gaming varieties.

That shift of emphasis – when applied to Macau’s casino resorts – could put some pressure on operational margins, noted a report on October 29 from Morgan Stanley Research.

Studio City – a US$3.2-billion mass-market focused casino resort project with lots of non-gaming amenities – opened on October 27 with only mass-market tables and electronic machines.

“Non-gaming is a crowd puller, but a margin drag,” noted the Morgan Stanley analysts.

Deutsche Bank mentioned on Friday that gaming business margins were also potentially facing pressure from a realignment of the local gambling market from VIP play to mass table play, combined with a significant increase in mass-market capacity.

“Despite mass revenue, adjusted for [table] reclassifications, growing [about] 2.5 percent in the third quarter of 2015 on a sequential basis, aggregate market EBITDA [earnings before interest, taxation, depreciation and amortisation] margins, as a percentage of GGR, declined [circa] 110 basis points [bps] year-on-year, compared to an [about] 80 bps year-on-year decline in the second quarter of 2015 and [about] 135 bps year-on-year decline in the first quarter of 2015,” wrote Mr Santarelli and Mr Valoy.