MS ups Macau 2018 GGR growth by 200 bps, flags new cycle
Banking group Morgan Stanley has raised its estimate for 2018 growth in Macau casino gross gaming revenue (GGR) by 200 basis points (bps), to 11 percent.
The institution said in a Monday report growth would be “mainly driven” by VIP revenue growth of 11 percent year-on-year – versus its previous forecast of 9 percent – while it thought mass-market play would remain on forecast at 10 percent year-on-year expansion.
Accumulated year-on-year GGR growth in Macau for the 10 months to October 30 this year stood at 19.2 percent, according to data from the local regulator, the Gaming Inspection and Coordination Bureau.
The Macau government – known for its caution in GGR forecasting – estimated in commentary on Friday that the market would grow in 2018. But comments attributed to Lionel Leong Vai Tac, the Secretary for Economy and Finance, didn’t venture as to whether the 2018 GGR growth rate would actually be an improvement on 2017, or give commentary on the likely structure of the market. Mr Leong was quoted as saying that 2017 GGR would “continue to increase at a rate above one single digit” and that full-year 2017 GGR would be “better than last year’s”.
Morgan Stanley said in its Monday report that it thought Macau had entered what it termed a “new ‘up’ cycle” and expected the revenue of the city’s six casino operators to grow in aggregate at a compound rate of 10 percent annually through to 2022, driven by local infrastructure improvements such as the Hong Kong-Zhuhai-Macao Bridge, and rising consumer spending by gamblers from Macau’s main target market, mainland China.
The institution thought that could push Macau GGR to the equivalent of US$53 billion in 2022. This sort of GGR growth, combined with lower capital expenditure by the six operators as development of their respective land concessions is concluded – with capital spend in the next five years in likelihood aggregating to US$2 billion per annum market wide, rather than the US$5 billion per annum Morgan Stanley says has been spent by the industry in the past four years – would result in dividends and capital returns growing from a current US$3 billion per annum market wide to more than double that by 2020.
“We believe the sector market capitalisation could grow to US$230 billion (double the current value) if the companies in our coverage universe are able to re-rate like Sands China [Ltd] or high-growth Asian REITs [real estate investment trusts], as they start returning all of the free cash flow to shareholders,” wrote the Morgan Stanley team.
It noted: “Macau GGR grew in 2003 to 2016 at a rate of 17 percent per annum due to low [addressable market] penetration, which remains the case even today (at 2 percent in Macau versus 13 percent in the U.S.).”
The authors added: “In this cycle, we think the quality of growth will be better, as more than 80 percent of the forecast profit should come from the mass-market segment.
“Starting in 2018, we expect to see game-changer infrastructure developments with respect to the Hong Kong-Zhuhai-Macao Bridge and Hengqin [Island],” the analysts added, referring latterly to a piece of mainland territory next door to Macau that is the focus for non-gaming tourism infrastructure development.
The Morgan Stanley team further noted: “We also think that by 2022, there will be clarity around licence renewal [sic]… development capex and infrastructure ramp” in the Macau market.
The present three concessions and three sub-concessions expire on various dates in either 2020 or 2022. They can be extended in increments of time to a maximum of five extra years from the time of their original expiry. After that, a new concession process must take place, involving a new public tender.
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