The retreat of Macau’s VIP market might be gathering pace in September but gaming analysts are now more concerned about the mass market, which is “sharply slowing”, says a new note from Deutsche Bank AG.
Hong Kong-based analyst Karen Tang warns that mass gross gaming revenue (GGR) growth could be flat in October, following a sharp decline this month.
“VIP [decline] is worsening from -17 percent [year-on-year] in August to -25 percent to -30 percent in September. But our biggest concern is in mass. Mass [growth] is sharply slowing from 15 percent [year-on-year] in July-August to 8 percent to 10 percent in September, and potentially to 0 percent in October,” Ms Tang wrote in a note on Monday.
According to Deutsche Bank, mass revenue growth slowed drastically from 32 percent year-on-year in the first half of 2014 “to 15 percent year-on-year in July-August”. While mass GGR growth could slow to 8 percent this month, it could be flat in October partially because of the smoking ban, Ms Tang said.
All mass-market gaming floors in Macau must go smoke-free starting from October 6, following next month’s Golden Week holiday.
October results also face a tougher comparison from the year-earlier period. “October 2013 mass revenue grew 40 percent year-on-year versus 33 percent year-on-year the previous month,” the analyst wrote.
Ms Tang cited casino hosts as saying the recent slowdown in visits by high-frequency mass players and premium mass players had the most impact on the market.
High-frequency players, especially those from Guangdong province, “were restricted by tighter transit visa rules,” she explained. Macau tightened the rules for mainland Chinese passport holders who transit in the city since July 1.
Premium mass-market players account for the top of the mass market, using bets measured in many thousands of Hong Kong dollars per hand.
“High-end premium mass players, similar to VIPs, now preferred to remain low profile in the anti-corruption climate. Visits by high-end premium mass had fallen by around 10 percent, according to some casino hosts,” said Ms Tang.
She added: “Also, as we walked through the mass casino floors of the major 10 casinos in early September, we found the premium mass areas very noisy with heavy construction activity to install glass walls to segregate the premium mass areas into ‘private gaming’ areas ahead of the smoking ban deadline on October 6. We believe there was considerable business disruption to the premium mass area in early September.”
Junket market share
The city’s VIP market is also worsening as high-rollers shy away from casinos.
Several recent reports have suggested that the corruption crackdown in mainland China is likely to be the main driver of the decline due its apparent depressive effect on demand for VIP gambling in Macau.
“Under the anti-corruption climate, agents found it increasingly difficult to collect gambling debts from VIPs in China. Since VIP players are coming less frequently to Macau, they also have less incentive to repay gambling debt quickly. Many agents now had to ask junkets for longer credit period, often for lower agent rates,” Ms Tang wrote.
Since small junkets are unable to offer these new terms given tight cage capital, “big junkets are gaining market share,” she added.
The analyst said the reshuffle of junkets’ market share is hurting Sands China Ltd, SJM Holdings Ltd and Wynn Macau Ltd “as their exposures to big junkets are relatively lower”.
September could be the worst ever year-on-year decline in more than five years, “even worse than during [the] ‘Asia Crisis’ (-17 percent year-on-year in January 2009),” warned Ms Tang.
GGR for August fell by 6.1 percent year-on-year to MOP28.9 billion (US$3.6 billion). A new drop in September would be the fourth consecutive month of declines in year-on-year terms.
Analysts have said that if the Macau VIP segment does not improve, market consensus on 2015 “has room to fall”.
In Monday’s note, Deutsche Bank said it is concerned that 2015’s supply “will fail to create demand” – at least two new casino resorts are scheduled to open in Cotai next year, namely the second phase of Galaxy Macau and Studio City. The bank cut its GGR growth estimate for next year to 1 percent from 10 percent, much below consensus of between 8 percent and 12 percent. The forecast for 2014 GGR was cut to -1 percent.
“If anti-corruption efforts remain, VIP may fall another 5 percent in 2015, despite easier comparisons in the second half [of the year]. VIP bet size tends to be related to how fast easy-money is made,” wrote Ms Tang.
She added: “On mass, while the market already expects new casinos will drive visitor demand in 2015-17, the market seems to ignore the negative impact from supply on pricing… We think [table] yield will fall 20 percent to US$10.4k/day by 2017. Also, new hotel supply will almost certainly lead to casinos increasing ‘comp-ed’ rooms to lower-tier players, lifting promotional costs as percentage of GGR.”
Deutsche Bank cut its price targets for Macau gaming stocks by between 17 percent and 33 percent across the sector.
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