Investment analysts are expressing concern not only about Cotai table allocation but to what extent new casino supply will create incremental demand from gamblers in the current trading climate in Macau.
Macau government allocation of gaming tables for under-construction Cotai casino resorts has potential for “disappointment” and remains “a near term overhang” for the sector’s shares, said a note on Monday from UBS Securities Asia Ltd.
“We expect differentiation in eventual allocations for different projects based on their type, investment size, non-gaming components and company’s existing stock and utilisation of tables,” added analysts Anthony Wong and Angus Chan.
The city’s operators no longer talk in filings about likely number of tables for new projects, but instead refer to the “capacity” of the venues to house tables, slots and electronic table games.
New casinos on Cotai might need to generate gross gaming revenue (GGR) of US$200 million to US$350 million each per quarter to break even in terms of earnings before interest, taxation, depreciation and amortisation (EBITDA) and earnings per share (EPS), said a research report on Monday from Morgan Stanley Research Asia Pacific titled ‘Perfect Storm Lengthened’.
“To achieve positive EPS, casinos may have to generate VIP/mass/slot win per unit per day of US$18,000, US$9,000 and US$300 respectively,” said the report by Praveen Choudhary, Alex Poon and Thomas Allen.
“Staff costs represent 50 percent to 60 percent of total fixed costs (excluding depreciation and amortisation), based on 7,000 new staff per casino and US$3,000 all-in costs per staff per month,” added the research document.
On Friday, MGM China Holdings Ltd – operator of MGM Macau and currently constructing the US$3-billion MGM Cotai resort – announced staff pay rises for 2015 equivalent in some cases to a percentage above the city’s rate of annual inflation for 2014.
Morgan Stanley said in its Monday note that Macau VIP patrons are now typically checking in HKD3 million (US$386,349) to HKD5 million in chips per visit, versus check ins of HKD10 million to HKD30 million prior to June last year, when the market was still growing.
The research team added that lack of liquidity in the China housing market had made it hard for VIP patrons “to monetise these assets even at discount to repay junkets”.
“VIPs in Guangdong province are generally spending less than other regions of China,” added Morgan Stanley.
The first new Cotai projects expected to open this year – currently scheduled for May 27 – are Galaxy Entertainment Group Ltd’s HKD19.6-billion Galaxy Macau Phase 2 and its accompanying HKD5-billion ‘Broadway at Galaxy Macau’ property.
Galaxy Entertainment has said in previous public statements that Galaxy Macau Phase 2 has capacity for 500 tables and 1,000 slot machines.
Lawrence Ho Yau Lung, co-chairman and chief executive of Melco Crown Entertainment Ltd, in January said he “hoped” the firm’s majority-owned Studio City project (pictured) – expected to open in the third quarter of 2015 – could get as many as 400 tables early in the resort’s operation. It has capacity for 500, the firm says.
In Melco Crown’s fourth quarter earnings call in mid-February, Mr Ho added: “We still believe that we really do need 400 tables to make the casino kind of happening and busy….we have worked on scenarios where [there are] fewer tables than that, but it would be less than optimal.”
On Monday a number of analysts issued preliminary estimates on March GGR, based on unofficial industry returns.
Credit Suisse AG said that assuming average daily revenue of MOP650 million (US$81.3 million) to MOP750 million for the rest of month, March GGR might drop by between 36 percent and 41 percent year-on-year.
“On the ground, we hear the small- and mid-sized junkets [are] gradually scaling down the business and consolidating the VIP rooms across properties,” said the bank’s analysts Kenneth Fong and Isis Wong, adding that would in likelihood mean further VIP room closures.
Michael Ting of CIMB Securities Ltd estimated the fall in March revenue would be 37 percent year-on-year, despite the GGR improvement seen in the past week.
“While the growth in weekly GGR may provide a short-term catalyst for the shares given the recent weakness, we remain cautious on the gaming stocks given the lack of significant catalysts in the near-term as we do not expect GGR to see positive year-on-year growth until the fourth quarter of 2015 on a low base and increased capacity,” said Mr Ting.
Japanese brokerage Nomura said it expected March GGR to fall 36 percent to 40 percent year-on-year, while Cameron McKnight of Wells Fargo Securities LLC indicated a year-on-year decline for the month of 36 percent to 39 percent, versus a prior estimate of 37 percent to 41 percent.
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”We expect Okada [Manila] to add US$1.2 billion of GGR by 2019 to the overall market, capturing 32 percent market share”
Alex Poon and Praveen Choudhary
Analysts at Morgan Stanley