There are likely to be “more losers than winners in the medium term” among Macau’s gaming operators as the new Cotai resorts open in a challenging market, said a report on Thursday from Deutsche Bank Securities Inc in New York.
“Based on our analysis and most importantly our market GGR [gross gaming revenue] forecast, which doesn’t subscribe to the ‘If you build it they will come’ mantra, we believe there are more losers than winners in the medium term with the Cotai pipeline build out,” said analysts Carlo Santarelli and Danny Valoy. They noted that there is roughly US$16.8 billion in large-scale casino capital expenditure at present in Macau, plus US$1.6 billion of project capital in several smaller projects.
“We believe [Macau] GGR needs to be 120 basis points better than our current estimate in 2015″ – a decline of 32.9 percent versus Deutsche Bank’s forecast of a GGR fall of 34.1 percent – merely to offset the fixed cost increases related to Galaxy Macau Phase 2 and Macau Studio City, wrote the two analysts.
At the level mentioned, any decline in industry EBITDA (earnings before interest, taxation, depreciation and amortisation) in Macau would be purely related with the “GGR decline plus negative operating leverage”, and not fixed costs incurred with the opening of new properties, said the bank.
“With five major properties in our analysis (Galaxy / Studio City / Parisian / Wynn Cotai / MGM Cotai), the annual increases imply roughly US$375 million of annual fixed costs come online with each major opening,” wrote Deutsche Bank.
Galaxy Macau Phase 2, a HKD19.6-billion (US$2.5-billion) project from Galaxy Entertainment Ltd, opened on May 27. The US$3.2-billion Studio City, 60-percent owned by Melco Crown Entertainment Ltd, is to launch on October 27.
“We believe operators with historically favourable fair share spreads, whose individual [gaming] position / room footprint growth outpaces the market rate of growth, are best positioned to differentiate from the overall market performance,” wrote Deutsche Bank, saying that Wynn Macau Ltd and MGM China Holdings Ltd fit that profile.
But brokerage Sanford C. Bernstein Ltd in Hong Kong said in a note on Friday that it thought Melco Crown was in a good position to capture “outsized share” in the premium mass gambling segment due to the way it had honed such operations at its existing Cotai flagship property, City of Dreams, also known within the industry as CoD. ‘Premium mass’ is a reference to a Macau customer segment mainly playing table games for higher stakes but in cash rather than on credit, and normally at lower minimum bets than VIP punters.
“CoD delivers outsized success in premium mass largely due to customer acquisition and retention strategies, providing superior service and product offering, and strong premium mass host staff. Consequently, Melco Crown has the highest mass table efficiency (i.e., win per unit per day) amongst all six Macau casino operators,” wrote Sanford Bernstein analysts Vitaly Umansky, Simon Zhang and Bo Wen.
2016 and beyond
The management of Wynn Macau Ltd aims to open its new US$4.1-billion casino-resort on Cotai, Wynn Palace, on March 25, 2016, company chairman Steve Wynn said during a conference call following the announcement of the second quarter results by parent Wynn Resorts Ltd in late July.
In August, MGM China Holdings Ltd said it remained “on schedule” for a fourth quarter 2016 opening of its HKD24-billion MGM Cotai resort (pictured). The quoted budget excludes land costs and capitalised interest.
The US$2.7-billion Parisian Macao, from Sands China Ltd, is “probably going to have an opening in about 12 months,” said a senior executive of the developer’s parent Las Vegas Sands Corp during its second quarter earnings call in late July.
SJM Holdings Ltd, the casino operator founded by Stanley Ho Hung Sun, in February said it expects construction of the approximately HKD30-billion Lisboa Palace on Cotai “to be completed in the fourth quarter of 2017”.
Deutsche Bank noted in its Thursday report that currently in Macau what it termed the “major”casino properties account for roughly 98.5 percent of total market GGR.
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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