Why Investors See Macau’s 40% Casino Sales Drop as Good News

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Macau's Casino Gambling Revenue
Pedestrians cross a road while traffic waits at a red traffic light in front of an entrance to the Casino Grand Lisboa in Macau, China. Macau casinos are facing their lowest revenue since 2011 as the Chinese economy slows and President Xi Jinping nationwide graft crackdown stretches into a third year. Photographer: Billy H.C. Kwok/Bloomberg

This is what passes for good news in Macau these days: the city’s drop in casino revenue is stabilizing at about 40 percent.

Gross gambling revenue in the world’s largest gambling hub fell 39 percent to 21.5 billion patacas ($2.7 billion) last month -- the second-worst monthly decline on record -- according to data released Wednesday by Macau’s Gaming Inspection and Coordination Bureau. That met a median estimate of 40 percent from nine analysts surveyed by Bloomberg.

“The in-line result is just showing that the market is stable. I would think that the worst dip is over,” said Shengyong Goh, a Hong Kong-based gaming analyst at BNP Paribas SA. “It’s going to be long time before any upside catalyst.”

SJM Holdings Ltd. jumped 2.8 percent in Hong Kong trading, while Melco Crown Entertainment Ltd. and MGM China Holdings Ltd. each gained 2.3 percent. Galaxy Entertainment Group Ltd. climbed 1.8 percent, followed by Sands China Ltd. and Wynn Macau Ltd., which increased 1.7 percent and 0.7 percent, respectively.

Macau casinos are facing their lowest revenue since 2011 as the Chinese economy slows and President Xi Jinping nationwide graft crackdown stretches into a third year. The campaign has hurt sales of luxury goods and deterred high rollers from visiting the country’s only legal enclave of casino gambling. A smoking ban in casinos and stricter visa rules have also damped business.

The former Portuguese colony recorded its biggest-ever drop in monthly gaming revenue in February -- almost 49 percent -- due to weak demand over the Lunar New Year holiday, usually a peak gambling period. Today’s figure was the city’s 10th straight month of decline.

The latest data shows that revenue for the first quarter fell 37 percent to 64.8 billion patacas.

Forecast Cut

Revenues from high-stakes gamblers may bottom out soon, said Credit Suisse Group AG analysts led by Kenneth Fong, saying their surveys of junket operators indicate that VIP volume was similar to January.

Junket operators are the middlemen who bring to Macau many of the high rollers whose business accounted for about 60 percent of last year’s total revenue.

Most of the negative news has been largely priced into casino shares, the Credit Suisse analysts said.

“While initial sign of sequential stabilization for VIP volume is encouraging, the further deceleration of mass-market revenue may weigh on the share price,” they said. The brokerage retained its “neutral” rating on the sector as the outlook remains uncertain.

Forecast Cut

The contraction in Macau has led analysts to cut their forecasts for casino receipts this year to about 278 billion patacas, which would be the smallest take since 2011. Revenue was expected to fall 21 percent, according to the median estimate of 13 analysts surveyed by Bloomberg, more than double the decline they had projected in January.

Macau’s government reduced its average monthly forecast to a figure that would represent a 32 percent plunge from last year, Chief Executive Fernando Chui said last week.

The downward revisions were largely finished and shares of casino operators could see a rebound, Deutsche Bank AG analyst Karen Tang wrote in a note after the data was released. “However, we think any relief rally will be short-lived as first-quarter results will show how consensus still underestimates margin squeeze,” Tang said.

Macau is trying to diversify its economy and develop itself into a global tourism center to cut its reliance on casino gambling.

Casino operators are adding shops, restaurants and other non-gaming entertainment attractions to attract more middle-class consumers. In May, Galaxy Entertainment will be the first among the city’s six major casino operators to open a new wave of new and expanded resorts.

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