Brokerage Wells Fargo Securities LLC is betting against Macau’s mass-market gaming segment outpacing VIP play during 2017 in terms of percentage growth of casino gross gaming revenue (GGR).
The institution says that in this respect it is going against the consensus view of analysts.
“We expect VIP growth to accelerate for the next three quarters, up 15 percent for the full year. In contrast, we expect higher margin mass-market growth to decelerate through 2017, with 4 percent full-year growth,” said analysts Cameron McKnight and Robert Shore in a new report.
The 68-page lookahead analysis of the Macau casino market for 2017 is titled: “This Time It’s (Not) Different. Not Chasing the Year of the Rooster”. The latter is a reference to the next 12 months as defined under the Chinese zodiac.
A Monday report from Japanese brokerage Nomura said it expected the compound annual growth rate of the city’s mass-market table games GGR to be 7 percentage points higher than that for VIP table games in the 2017 to 2019 period, at 9 percent compared to 2 percent for the high roller business.
Wells Fargo said in its in-depth analysis regarding the prospects for 2017: “The big difference between our view and the [market] consensus is that we expect growth to be driven by the lower margin VIP segment, as a result of tighter capital controls driving premium mass customers back to the VIP junkets, and growth driven by Chinese liquidity growth and a housing bubble,” the authors noted.
Brokerage Sanford C. Bernstein Ltd said in a Tuesday report on China’s macroeconomic outlook for 2017 that recently credit growth had been less influential on gaming revenue performance driven by Chinese VIP players than had Chinese central government policy on money supply.
Were both VIP and mass-market revenue expansion to be constrained in Macau, it would potentially create a more modest recovery than had been seen after previous revenue retreats in the city’s casino market.
“While the market has stabilised and some growth has returned, we believe this recovery could stall once the stimulus from loose credit and the Chinese housing bubble wears off – as it did in 2013/14,” wrote Wells Fargo’s Mr McKnight and Mr Shore.
“The big difference with the 2013 recovery is that the stimulus fuelling it is significantly smaller, yet valuations still imply a steep 2013-style recovery,” they added.
The two analysts suggested that one lesson from the launch, in October 2015, of Melco Crown Entertainment Ltd’s majority-owned Studio City – initially without any VIP gambling rooms – was that so-called ‘grind mass’ play cannot currently plug any profitability shortfall if VIP players are not in the picture or stay away from Macau.
“More investors are questioning the thesis that Macau’s long term growth will be driven by low-spending, grind mass customers,” said Wells Fargo.
“Studio City’s opening pointed to the relatively low profitability of grind mass business. Las Vegas Sands’ [Macau] grind mass business didn’t grow over 2016. In addition, over the past quarter, we’ve arguably seen meaningful premium mass market business mix-shift back into the junket VIP segment as [China’s] currency controls have increased – suggesting that a large part of the market is still relatively wealthy customers,” stated the brokerage.
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"VIP growth [in Macau] is roaring back on the heels of last year’s economic stimulus – but we think this could stall once the effect of the stimulus and the Chinese housing bubble wears off – as it did in 2013-14"
Cameron McKnight and Robert Shore
Analysts at Wells Fargo Securities