Another month, another set of ugly numbers from the world’s casino capital. Macau’s gross gaming revenue (GGR) in November fell 19.6% from a year ago to 24.3 billion Macau patacas (MOP; US$3.03 billion), roughly in line with forecasts. That’s the lowest GGR total since September 2012, when casinos took in MOP23.9 billion, the low for that year and the last time monthly GGR fell short of $3 billion.
Through the first 11 months of this year, after six straight months of declines, Macau GGR is up a scant 0.3% or $118.5 million, likely heading for its first annual fall since liberalization began with the opening of Sand Macao in 2004.
In Hong Kong trading on Monday, shares in the gaming operators fell, except for Melco Crown Entertainment which was up throughout the day and closed ahead 0.61%. The other operators’ share price losses were less than the benchmark Hang Seng Index’s brutal 2.58% drop, with the exception of Galaxy Entertainment Group, down 2.64%, and Macau Legend Development, which runs two casinos on the peninsula under the license of SJM Holdings, down 4.19%, briefly touching its low for the year.
Analysts see more dark days ahead for Macau's casino revenue. (Photo credit: Wikipedia)
Despite improving investor sentiment over the past six weeks, analysts have been warning that enthusiasm hasn’t been matched by improving fundamentals. In a report issued last week, Credit Suisse analysts Kenneth Fong and Isis Wong say mass market revenue continues to fall and last month’s rate cut by the People’s Bank of China (PBOC) doesn’t address key Macau issues including the impact of the anti-corruption campaign, tightening of travel visas and the smoking ban that took effect in October. They also caution earnings expectations remain inflated. Their EDITDA estimates are 11.6% below consensus for this quarter and next year. On current trends, they warn Wynn Macau could miss fourth quarter estimates by 20%.
Morgan Stanley says Macau hasn’t reached the bottom yet in either revenue or share price declines. After a large investor conference and visiting Macau, analysts Praveen Choudhary, Alex Poon and Thomas Allen write, “Grind mass could be the last shoe to drop,” in the current trend of falling revenue. They also note that bet sizes are shrinking across the board. They estimate margins can hold if mass growth tracks at 5%, but declining mass play will impact margins and could lead to promotion competition, putting further pressure on margins, along with increased labor costs, including the new 14th month salary payments.
Wells Fargo Securities says that credit expansion in mainland China has created a bottom in previous Macau gaming downturns and emphasizes, “We are not there yet.” Analysts Cameron McKnight, Rich Cummings and Tiffany Lee see the PBOC rate cut as an indication of continued deceleration in the mainland economy, not a fundamental shift in policy toward looser money. They believe the direct impact of the rate cut will be limited, but see the long term impact as positive. “Indirectly, the action demonstrates Beijing is willing to be accommodative when required, which could signal further rate cuts.” None of that, though, changes the grim short term outlook. The analysts warn President Xi Jinping’s visit to commemorate the 15th anniversary of Macau’s handover later this month may offset the normal trend of December sequential growth from November.
Union Gaming Research Macau suggests December GGR will be roughly similar to November, a year on year December decline of roughly 25%. Analysts Grant Govertsen and Felicity Chiang estimate, barring a December surprise on the upside, GGR for 2014 will decline 2% from last year’s $45.1 billion. They also expect revenue numbers for January and March similar to November and December, with February down approximately 20% from this year’s record $4.75 billion, suggesting an overall revenue decline of 20% for the first quarter of next year. None of the analysts see a recovery until at least the second quarter of 2015.
Still, it beats the heck out of Atlantic City.
