GGRAsia – Risk if Macau VIP decline is long-term: analysts

Risk if Macau VIP decline is long-term: analysts

Sep 17, 2014 Newsdesk Latest News, Macau, Top of the deck

September’s gross gaming revenue (GGR) from Macau casinos could be the lowest tally for that month since September 2012, says a note from Japanese bank Nomura.

It is the latest bearish assessment among several from investment analysts in the past fortnight, although many have been forecasts based on unofficial industry returns rather than Macau government-sanctioned numbers.

Several of the forward looking reports have suggested that the corruption crackdown in mainland China is likely to be the main driver of the three months of consecutive year-on-year decline already confirmed via official figures in Macau GGR this year, due its apparent depressive effect on demand for VIP gambling in Macau. VIP baccarat GGR was 60 percent of all casino GGR in the second quarter this year.

Karen Tang of Deutsche Bank AG in Hong Kong, was one of the first to suggest a demand-side problem with VIP gambling in a note on September 1.

That is a theme also taken up by Nomura analysts Louise Cheung, based in Hong Kong, and Harry Curtis, based in New York, in their latest assessment on Tuesday.

But they also point out that there are some seasonal factors for the month. They include the passing of Typhoon Kalmaegi, which caused the number 8 tropical storm warning signal to be raised in Macau on Monday night, leading to the suspension of public transport including ferries. Such events typically have a negative impact on gaming volumes in the months in which they occur.

“Factoring in the impact from Typhoon Kalmaegi and the expected slowdown preceding the October Golden Week [holiday], we estimate September GGR could be [between] MOP24.2 billion [US$3.03 billion] to MOP25.1 billion (or down 13 percent to 16 percent year-on-year),” said the Nomura team, adding that range would be below the consensus expectation of high single digit to low teens percentage decline.

“This would be the lowest monthly GGR figure since September 2012,” stated Ms Cheung and Mr Curtis.

Structurally the main reason for the likely year-on-year decline for September is the VIP segment.

While Nomura expects September mass-market revenues could be up about 10 percent to 15 percent year-on-year, it thinks VIP revenues could be down by as much as between 28 percent to 32 percent year-on-year, even taking into account variations in house win rates for live dealer baccarat, the table game of choice for all Chinese VIP gamblers in Macau.

The two analysts say in a separate note the same day that if the Macau VIP segment does not improve, market consensus on 2015 “has room to fall”.

They write: “Against a backdrop of China macro uncertainty and President Xi [Jinping] advocating a less lavish/more simplistic lifestyle (and pushing through corresponding reforms e.g. lowering SOE [state-owned enterprise] management pay…the Street is expecting a VIP recovery in 2015F (with the high end of consensus looking for 5 percent to 8 percent VIP growth).”

But Nomura says a bear case based on poor VIP performance extending into next year could see the whole market decline by 1 percent year-on-year in 2015.

In a note on Wednesday, analysts Kenneth Fong and Isis Wong of Credit Suisse AG in Hong Kong, give some insight – based they say on conversations with Macau casino industry sources – on the effects of the mainland’s corruption crackdown

“The stepping up of [the] anti-graft campaign in China may not only affect the senior officials and state-owned enterprises, but may also prompt the corresponding related parties laying low during the sensitive period,” they write.

They highlight the removal from post and placing under investigation in late June of Wang Qingliang, a member of the provincial standing committee of Guangdong and the Communist Party of China’s secretary of Guangdong.

“Note, Macau sourced [about] 40 percent of its Chinese visitation from the Guangdong province, the political headwinds in China are likely to prompt some frequent players to cut down their visits to Macau,” write Mr Fong and Ms Wong.

They state: “In fact, we are noticing that the junkets are increasingly bringing players to other overseas destinations to avoid frequent appearance in Macau in light of the current sensitive political situation. Gaming destinations including Philippines, Australia and Las Vegas had demonstrated strong VIP trend in 2Q14.”

The analysts add: “…shorter term, as the dust settles and players return, [Macau] VIP revenue could gradually recover. However, longer term, part of the VIP revenue would be hurt permanently as the ‘easy money’ could be significantly reduced in the future.”