The monthly sequential decline in Macau’s VIP gross gaming revenue (GGR) has generally narrowed in the year to August 31, says a new research note from Deutsche Bank AG in New York.
The pattern in sequential variations for 2014 still shows some unseasonal volatility. But the variance from changes that can typically be expected month-on-month, based on average sequential monthly changes recorded between 2010 to 2013, has generally narrowed, indicates the research from Carlo Santarelli.
The bank says that doesn’t change its overall assessment of the challenges currently facing the market and investors.
It thinks that VIP revenue and mass-market revenue combined will still produce year-on-year declines of 18 percent in October, 12 percent in November and 15 percent for December.
“Our overall revenue forecasts [year-on-year] for 4Q14, 2014, and 2015 are -15.3 percent, -0.4 percent, and +2.6 percent,” wrote Mr Santarelli.
But the institution does suggest its sequential analysis offers an alternative tool in attempting to understand what is happening in the Macau market.
“While we have often tried to contemplate bottoms for the Macau [gaming] names based on various valuation support levels, in an environment like this, we worry that approach is a bit treacherous,” wrote the analyst.
“As such, this note is an effort to identify how current trends are likely to manifest in results through the balance of the year, when examined through historical sequential scenarios.”
Mr Santarelli’s research indicates that January 2014 produced a 19.2 percent decline in VIP GGR compared to the preceding December. VIP baccarat play is the single biggest component of play in Macau casino games. It provided 63.6 percent of all casino GGR in the first quarter of 2014, according to data from the local regulator, the Gaming Inspection and Coordination Bureau.
The sequential December 2013 to January 2014 decline in VIP noted by Deutsche Bank, compared to an average gain of 3.9 percent for the same sequential period in the years from 2010 to 2013 inclusive, said the institution.
But by May to June the decline appeared to have flattened out at 12.8 percent, versus an average over the same period in the previous four years of a 9.3 percent decline – also showing the seasonal influences on sequential comparisons versus year-on-year ones.
By the July to August period, the sequential decline was down to 0.8 percent, versus a four-year average of 5.5 percent sequential gains.
“From a stock perspective, given the significant level of ambiguity around the Macau market fundamentals, most notable of which being the VIP/junket roll and mass segment margin issues, we are more inclined to wait for a semblance of fundamental stabilisation in the market, than attempt to pick an absolute valuation based bottom,” said the Deutsche Bank analyst.
He added: “Said simply, we believe a market which has tripled gaming revenue over the last 5 years on just 34 percent total visitation growth (2013 versus 2009), could potentially lead to optically [at first appearance] inexpensive valuations that ultimately prove to be fair if not expensive given the difficult to forecast results.”
Mr Santarelli added that likely headwinds included an expected new television report on Macau from the Public Broadcasting Service in the U.S.
He said: “…a sure to be less than favourable Frontline news report on Macau later this month…could bring with it further scrutiny, and we think the set up remains challenging through year end.”
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