Watch out for Macau’s good news: JP Morgan
Investor sentiment on Macau gaming is sometimes trailing behind what the latest market trends indicate, suggests a report from JP Morgan Securities (Asia Pacific) Ltd.
“Following a significant and prolonged earnings revision cycle over the past two years, market expectations have finally become reasonable, if not conservative, in our view,” said the report on Wednesday from analysts DS Kim and Daisy Lu in Hong Kong.
“Demand and profits are stabilising already, sell-side expectations are low, investor sentiment looks overly bearish, and [share] valuations have become compelling,” added the analysts.
Macau operator Sands China Ltd – the first of the city’s casino licensees to report its fourth-quarter and full-year earnings – showed in a Thursday filing in Hong Kong that its net income decreased 29.3 percent year-on-year in the fourth quarter. Mass-market chip drop was down 17.3 percent year-on-year and rolling chip volume – a different measurement relating to the health of the high roller segment – was down 50.8 percent.
On a conference call with investment analysts following the company results announcement, Sands China chairman and chief executive Sheldon Adelson said, “We do see stabilisation in gaming revenue trends [in Macau].”
A number of analysts think that casino gross gaming revenue (GGR) for mass-market play in Macau could not only stabilise in 2016 but possibly move into positive territory this year, boosting the city’s entire casino industry.
“More important than the backward-looking numbers, investors are more focused on signs (such as recent GGR trends) that may suggest some fundamental bottoming for the overall gaming sector (which we forecast to be the latter part of 2015),” said brokerage Sanford C. Bernstein Ltd in a note following the Sands China quarterly numbers.
Aaron Fischer of brokerage CLSA Ltd said on Tuesday at a press preview for Global Gaming Expo Asia 2016 that his institution expected overall casino GGR to rise 1 percent this year, driven by 10 percent year-on-year expansion in mass play and an 8 percent decline in VIP, compared to the 39.9 percent decline in VIP seen in 2015.
Policy support
The JP Morgan team said some support this year for the industry might come via public policy.
“Whilst ‘explicit policy easing’ may be hard to come by, many cautiously believe that the government could actually take a ‘pragmatic approach’ to support the economy/industry,” wrote Mr Kim and Ms Lu.
They cited as an example what they said was relaxation of immigration processes for mainland residents travelling to Macau using transit visas, with “faster processing with no more pre-clearance on documents, [and] less stringent checks on air tickets”, noting however that “there wasn’t any announcement or news” on such changes.
Analysts at Morgan Stanley Asia Ltd said in a note last week they see little pressure for policy easing in support of Macau’s casino industry, noting that the government surplus would still be “very comfortable” this year.
It was disclosed this week that the number of licensed gaming promoters in Macau – also known as junkets; the people that arrange the recruitment of VIP players and the provision of credit to them – shrank by 23 percent over the past 12 months.
The JP Morgan team said in its Wednesday report: “VIP remains steady in recent months despite junket noise and renminbi devaluation.”
The latter was a reference to China’s currency. Most Chinese players’ assets are denominated in Chinese currency, while Macau bets are usually denominated in Hong Kong dollars, a currency pegged to the U.S. dollar.
The JP Morgan team added: “Mass [gambling] demand has been slowly but clearly improving in the past two quarters (+2 percent quarter-on-quarter, per quarter).”
Grant Govertsen of Union Gaming Securities Asia Ltd said in a Thursday note following Sands China’s quarterly numbers: “While we don’t think the bleeding has necessarily stopped in premium mass [gambling] on a market-wide basis, it could finally be finding its footing – especially with the recent opening of the St Regis tower at Sands Cotai Central, which is clearly having a positive impact on premium mass play at this property.”
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