It could take Macau gaming revenue nine years to return to its 2014 level, assuming mid single-digit percentage growth in 2017 and beyond, said credit agency Fitch Ratings Inc in a briefing in Hong Kong on Wednesday.
In 2014, Macau casino gross gaming revenue (GGR) totalled MOP351.52 billion (US$44 billion) according to data from the local regulator, the Gaming Inspection and Coordination Bureau.
In 2015, casino GGR was MOP230.84 billion, down 34.3 percent year-on-year. The decline was driven, according to some investment analysts, by China’s anti-corruption campaign that had a chilling effect on high roller gambling, and by a slowing in mainland China credit expansion and a slowing in the expansion of the Chinese economy in general.
Macau’s all-time annual casino GGR record was in 2013, when the city recorded an aggregate of just under MOP360.75 billion.
“We expect mid single-digit growth in 2017 and beyond,” said Alex Bumazhny, Fitch’s senior director for gaming, lodging and leisure, referring to Macau gambling revenue.
“This assumes high single-digit mass-market growth and low single-digit VIP growth. With this growth rate it would take Macau over nine years to return to the prior gaming revenue peak reached in 2014,” said Mr Bumazhny.
For 2016, Fitch projects an approximately 5 percent decline in Macau’s gaming revenues.
Some investors in Macau gaming stocks had recently wondered aloud whether the Macau market had turned a corner after August casino GGR registered a 1.1 percent growth year-on-year; the first year-on-year expansion for 27 months.
August was buoyed – stated some investment analysts, citing unofficial figures – by the mass segment. The local regulator only gives the split between VIP and mass revenue on a quarterly basis.
Fitch’s Mr Bumazhny said Macau was unlikely to see what economists refer to as a “V-shape” recovery.
“While the last 14-month period, and August especially, gives us confidence that the market has found solid footing, we do not expect a V-shaped recovery and believe the market remains susceptible to the macroeconomic and regulatory conditions on mainland China,” said the Fitch analyst.
To achieve even mid single-digit growth annual in Macau casino GGR in 2017 and beyond, the underlying Chinese economy needed to avoid a “hard landing” and “other possible disruptions such as a one-time yuan devaluation,” said Fitch. The ratings agency was referring to the potential for the devaluation of China’s currency relative to the U.S. dollar. Bets in Macau casinos are mostly denominated in Hong Kong dollars, a currency pegged against the U.S. dollar.
Cameron McKnight, a senior analyst at brokerage Wells Fargo Securities LLC, said in a Wednesday note: “It’s important to note the booms in Macau revenues in 2010 and 2013 were preceded by a significant and sustained increase and acceleration in year-on-year and [money] credit growth [in China], which we’re not seeing here.”
Mr McKnight added: “Credit growth is still down from recent highs, and we’re not seeing another boom. August TTM [trailing 12 months] credit growth of 7 percent is down from 12 percent in January/February, when there was widespread speculation the Chinese government was stimulating en masse and [that] Macau was entering another boom.”
Fitch’s presentation addressed the issue of extra supply in the Macau casino gambling and hotel room market at a time of moderate demand.
The 1,700-room, US$4.2-billion, Wynn Palace, promoted by Wynn Macau Ltd, opened on August 22; and the 3,000-room, US$2.7-billion Parisian Macao from Sands China Ltd, launched on September 13. Another major property, MGM Cotai, from MGM China Holdings Ltd – with a budget of US$3.09 billion excluding land costs and capitalised interest – is due to launch in the second quarter next year. Grand Lisboa Palace, a US$3.9-billion property promoted by SJM Holdings Ltd, is slated for a 2018 opening.
“In this environment we expect little near-term incremental benefit for the concession holders from their respective multibillion-dollar expansions,” said Mr Bumazhny.
“We generally expect single-digit near term return on investment (earnings before interest, taxation, depreciation and amortisation/cost) for each operator from their respective projects, after accounting for cannibalisation from their own and competitors’ projects,” he added.
Analysts Praveen Choudhary, Alex Poon and Thomas Allen of Morgan Stanley said in a Wednesday note: “We think that the risk of self-cannibalisation could be underestimated.” The banking group was referring to the possibility that Parisian Macao had taken some business away from its neighbouring sister property, the Venetian Macao.
Fitch said in its Wednesday briefing: “Based on continuingly sagging luxury goods sales in Hong Kong, we believe that the appetite for luxury activities and goods remains tepid on the [Chinese] mainland amid the economic slowdown and corruption crackdown. We also point to the developing markets for VIP-gambling activity within the broader APAC [Asia Pacific] including the [Commonwealth of the Northern] Mariana Islands, Vladivostok and Philippines, all of which can afford to pay higher junket commissions given their lower tax structures.”
Morgan Stanley made a similar point in a Tuesday report on the outlook for the global VIP gambling market.
Fitch said nonetheless it maintained a “positive view” on Macau in the longer term, on the basis that the Asia Pacific region remained “underpenetrated, at least as far as the mass market is concerned”.
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"The [Macau] government has a lead in this subject in regards to what should be done after the [gaming] concessions expire. We will be first listening to what the government will say”
Ambrose So Shu Fai
Vice-chairman and chief executive at Macau casino operator SJM Holdings