Macau is entering a “multi-year earnings decline cycle”, said Deutsche Bank AG’s Karen Tang in a note on Tuesday.
She placed a ‘sell’ rating on all Macau casino stocks, citing negative factors including: falling VIP and premium mass play; smaller minimum bets from those that are still playing; competition from other gaming destinations; and more challenging operating leverage as local operators offer improved incentives to remaining players.
Underpinning all those factors, she suggested, was a change in the structure of China’s newly rich – away from people who have made their money quickly via good connections and from traditional commodities such as the coal industry – toward entrepreneurs in new industries that had made their money via innovation and merit.
“We…believe that wealth creation in China is changing from ‘resources and relationship-based’ in the last five years (as in the coal mining and property industries) into ‘innovation and entrepreneurial-based’ (as in Internet and consumer services) in the next five years,” Ms Tang wrote.
She added: “While these newly minted millionaires may also be gambling VIP-style, their average bet sizes will also likely be lower than the previous generations of coal mine owner VIPs.”
Deutsche Bank forecast that Macau VIP revenue would fall 35 percent year-on-year in 2015.
The analyst suggested that the ‘pull’ of weaker currencies in some other gaming jurisdictions had drawn Chinese players away from Macau during the recent Chinese New Year holiday period. She cited the fact that the euro, the Japanese yen and the South Korean won variously depreciated by between 7 percent and 17 percent versus China’s yuan in the past six months.
Total gross gaming revenue (GGR) in Macau fell 49 percent year-on-year in February – the period covering the Chinese New Year – although a sample of analysts said that allowing for a range of variables the real-terms fall was more likely to have been 35 percent.
“Over Chinese New Year, many premium mass players went to Europe, Japan and [South] Korea instead on weaker currencies. Many casinos had to comp [offer free] rooms to lower-tier players. We think The Street still underestimates this…operating leverage, and its margin impact,” Ms Tang wrote on Tuesday.
Average minimum bets on Macau’s mass gaming floors had already fallen 20 percent from the peak, said the report. The bank forecast that over the next three years, mass table yield would fall another 30 percent. It added that total GGR for 2015 was likely to fall by at least 25 percent year-on-year.
Deutsche Bank also said the idea that extra Macau supply of casino space and tables would necessarily create fresh demand was questionable in the new environment.
“A widely held consensus view for the gaming sector is that new casino properties can create incremental gaming demand as the new hotel rooms can accommodate more visitors. This had been true for Las Vegas in the 1990s and early 2000s. However, in Macau, this is not always the case. For example, City of Dreams opened in early 2009, but GGR still contracted 12 percent year-on-year in the first half of 2009,” said Ms Tang, referring to the period immediately after the global financial crisis began and to the opening of Melco Crown Entertainment Ltd’s flagship Cotai property.
Hong Kong-listed shares of Macau casino operators appeared on Wednesday to be heading for another day of declines. Shares of the Macau six casino concessionaires had fallen by between 2 percent and 3.5 percent of their opening price by the time of the midday trading break in Hong Kong.
If Deutsche Bank’s note and the share performance were not gloomy enough, Japanese brokerage Nomura said in a note on Tuesday that it was “concerned” that reported delays and cost rises on the Hong Kong-Zhuhai-Macau bridge project and delays to Macau’s Light Rail Transit (LRT) system would add to the challenges faced by the new Cotai resorts.
“The delay of the bridge and the intra-city light rail system (target opening is fall 2017) will create a significant traffic bottleneck once the new Cotai properties are operational in 2016,” said the Nomura team of Harry Curtis, Kelvin Wong and Brian Dobson.
The Sunday Morning Post in Hong Kong had reported on March 8 – quoting Li Chunhong, director of the Guangdong Development and Reform Commission – that the cost of bridge, which will span the Pearl River Delta, would rise above its HKD132.9 billion (US$17.1 billion) estimate because of a “significant delay”, with the extra expense to be shared by the three cities. The report added that a revised timetable for completion was likely to be announced in October, but quoted the official saying that the project was unlikely to be completed until 2020.
“The risk of infrastructure delays for the operators and investors is that the Cotai projects will ramp even slower than expected because the natural demand will be suppressed by the inconvenience of travelling to/within Macau,” said Nomura.
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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