GGRAsia – Wells Fargo downgrades large-cap gaming sector

Wells Fargo downgrades large-cap gaming sector

Sep 23, 2014 Newsdesk Latest News, Macau, Top of the deck

Shares of Macau casino operators traded in Hong Kong are heading for a second consecutive day of declines as Wells Fargo Securities LLC said the situation in Macau is continuing to deteriorate.

“September revenues are soft month-to-date, and if they hold at the current rate of MOP800 million [US$100.2 million] per day, September market revenues could finish down 17 percent year-on-year,” analysts Cameron McKnight and Rich Cummings wrote on a note issued on Monday.

“This can only imply weak October and fourth quarter results, given October is the toughest comparison of the year,” they added.

According to Wells Fargo’s VIP/credit model, VIP revenue growth in September could be down by 20 percent to 25 percent, which implies flat to negative mass revenue growth.

“Mass growth turning negative would represent a significant inflection point, in our view, and could put meaningful pressure on stocks,” Mr McKnight and Mr Cummings wrote.

In a note on Monday, Deutsche Bank AG also warned of a sharp slowdown in mass revenue growth.

Wells Fargo said the weakness would persist into October. “Given extremely weak VIP trends, softer mass growth and an incredibly tough compare, our expectation for the Macau market in October is -19 percent year-on-year growth based on -29 percent VIP and 0 percent mass growth,” the analysts said.

October is up against the most difficult comparison this year and will face a confluence of additional catalysts, the analysts added, highlighting a potential disruption from the smoking ban starting October 6 and “possible suppression of player demand” around the Chinese Communist Party’s Fourth Plenum, which is being held in October this year versus November last year.

Macau casinos have seen a slowdown in revenue growth, with recent reports pointing to China’s sluggish economy and a wide-ranging crackdown on corruption that has caused high-rollers to lay low.

Wells Fargo lowered its rating on the large-cap gaming sector from overweight to market weight, and cut its ratings on Las Vegas Sands Corp, Wynn Resorts Ltd and Hong Kong-based Melco Crown Entertainment Ltd from outperform to market perform.

“We feel near-term uncertainty has increased to the point that it’s become difficult to justify a 12-month overweight sector rating and pitch Macau gaming stocks as a new-money idea for the next six to 12 months,” said Mr McKnight and Mr Cummings.

The investment bank now estimates market-wide gross gaming revenue (GGR) to grow 5 percent in 2014, driven by 4-percent drop in VIP revenue and 24 percent mass growth.

Wells Fargo had said in a note last month that it was not expecting year-on-year growth in VIP GGR to resume before mid-2015.

In Monday’s note, Mr McKnight and Mr Cummings reiterated that they are still bullish on Macau casinos long-term but added, “It’s possible things will get worse before they stabilise and get better.”

The bank warned that 2015 estimates are too high. “We are now forecasting flat same-store total revenue growth in 2015, comprised of 10 percent same-store mass and -6 percent VIP growth,” the analysts wrote.

“We expect 5 percent total market growth, when factoring in the Studio City and Galaxy [Macau phase 2] openings,” they added, below consensus of about 10 percent.