Morgan Stanley is forecasting that overall gross gaming revenue in Macau casinos will shrink by 2 percent this year. A note issued on Sunday by the stockbroking arm of the investment bank says its analysts think the earnings of Macau casino operators may decline in the first quarter.
“The negative revisions mean more downside to stocks despite cheap valuations,” said the note written by Praveen Choudhary, Jeremy An and Thomas Allen.
The Macau gaming shares preferred by Morgan Stanley are those of MGM China Holdings Ltd and Melco Resorts and Entertainment Ltd.
“While Macau is a structural growth story driven by low penetration and improving infrastructure, we see the cyclical slowdown continuing in 2019,” the note said. “We change our industry view to ‘in-line’ from ‘attractive’ due to tightened liquidity, [the] full smoking ban pressuring VIP and premium mass growth in 2019, and potential decline in earnings before interest, tax, depreciation and amortisation year-on-year growth in the first quarter of 2019.”
A revised bill on smoking that bans tableside tobacco use in VIP rooms – the only places in the Macau casino context that were still allowing smoking at the gaming table – came into effect on January 1. A December report on the casino sector outlook for Macau from brokerage Sanford C. Bernstein Ltd said the new smoking rules were “likely a headwind for the industry”.
“We now expect 2019 GGR growth of minus 2 percent (was 5 percent), driven by negative VIP growth of minus 6 percent (was 0 percent) and slower mass growth of 2 percent (was 9 percent),” the Morgan Stanley team stated in its Sunday report, making reference to its previous estimates for the Macau market. “Licence renewal remains a key overhang, and could keep valuation multiples lower than long-term averages.”
The stockbroking arm of the investment bank added: “The first quarter of 2019 could see negative EBITDA growth year on year due to high base, higher opex and a smoking ban on premium mass and VIP areas.”
Morgan Stanley expects MGM China to increase its share of the market in Macau because of its MGM Cotai casino resort, and Melco Resorts to increase its share because of its Morpheus casino resort. Both properties were launched in 2018.
Macau’s casino GGR grew by 14 percent last year compared to 2017, according to the Gaming Inspection and Coordination Bureau. Last year’s accumulated GGR was about MOP302.85 billion (US$37.57 billion), compared to MOP265.74 billion the previous year. Most analysts have suggested this year’s GGR growth rate will be reduced, possibly to a figure less than 10 percentage points.
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“We see that basically the ‘golden’ periods [for Macau's casino industry] are all concentrated in the second half of this year”
Lei Wai Nong
Macau’s Secretary for Economy and Finance