Macau Prospects Unpredictable as Coin Toss as Views Clash

While analysts last year correctly forecast Macau casinos would suffer a first-ever revenue drop, prospects for 2015 are looking as uncertain as a coin toss.

Analysts surveyed by Bloomberg News were evenly split on whether revenue will shrink or grow in the world’s largest gambling hub this year. Gaming revenue fell 2.6 percent in 2014, ending a golden age in which growth spiked more than eightfold over a decade and transformed the former Portuguese enclave into a gambling center larger than the Las Vegas Strip.

Conflicting signals are muddling the outlook for 2015. While Chinese President Xi Jinping’s campaign against graft and extravagance is keeping high-rollers from the Baccarat tables, company steps to target mass-market tourists are making some analysts more bullish even as China’s economy cools.

“We are at the peak of uncertainty right now,” said Grant Govertsen, a Macau-based casino analyst at Union Gaming Group. While the company downgraded the sector in June on the view that “the anti-corruption campaign was a lot more fierce than people were giving it credit for,” it now expects single-digit revenue growth in 2015, he said.

Melco Crown Entertainment Ltd. fell 2.7 percent to HK$62.30 in Hong Kong trading, the lowest closing price since Dec. 23. The company said Jan. 2 after the market’s close that it will delist from the city’s stock exchange because of low trading volume, while keeping its Nasdaq listing.

Galaxy Entertainment Group Ltd. declined 2.8 percent, and Sands China Ltd. fell 1.2 percent, while the Hang Seng index slipped 0.6 percent.

Losing Streak

The most optimistic analyst predicted casino revenue will rise 10 percent this year, while the most pessimistic expected a 9 percent slump, giving a median estimate of a 0.35 percent year-on-year growth from eight analysts surveyed last Friday.

Most agree that there will be an eighth straight month of gaming losses in January, which would beat a record losing streak in 2008-2009 when revenue dropped seven straight months amid the global financial crisis.

The industry may fare even worse in February due to last year’s record sales over the Lunar New Year, traditionally a peak season for gamblers, according to Credit Suisse Group AG analysts led by Kenneth Fong. The brokerage estimates revenue will drop 14 percent to 18 percent this month and the decline could widen in February, Fong wrote in a Jan. 2 note.

More Scrutiny

Casinos are also grappling with weakening economic growth in China, as well as more scrutiny over junkets and stricter visa requirements that affect mainlanders going to Macau.

SJM Holdings Ltd., Asia’s largest casino operator by revenue, said Macau’s gaming industry will struggle to have a “breakthrough improvement,” according to a Dec. 31 internal memo obtained by Bloomberg News.

Macau, China’s only city that legally allows casino gambling, is facing pressure from Beijing’s tightening grip on money flows out of the mainland mostly by the high rollers who made up about two-thirds of its gaming revenue.

The government in Macau has restricted the use of China UnionPay Co.’s debit cards at casinos. The gambling regulator is also tightening scrutiny of agents used by junket operators, which arrange trips and provide credit for Chinese high-stakes gamblers.

Analysts such as CLSA Ltd.’s Aaron Fischer and Union Gaming’s Govertsen see the new resorts opening from mid-2015 as one silver lining as companies target mass-market customers amid a continued increase in visitors to Macau. The number of Chinese going to the city jumped 27.8 percent in November compared with the previous year, following a 20.5 percent increase in October, boosting demand for hotel rooms and other tourist amenities.

New Resorts

Galaxy’s second-phase expansion of its resort on the Cotai Strip will be followed by Melco Crown’s Hollywood-themed Studio City and Sands China’s Parisian resort featuring a replica of the Eiffel Tower.

In a visit to Macau last month, Chinese President Xi urged the newly re-elected leader Fernando Chui to develop a world tourism center and diversify an economy that relies on gambling for more than 80 percent of total government revenue.

Companies including Sands China and Galaxy are already shifting resources away from the high rollers to bet on vacationing Chinese or other mass-market gamblers by adding malls, theaters, restaurants and hotels.

“The next wave of customers is going to be lower-spending customers,” Fischer of CLSA said.

After the gaming downturn wiped out about $73 billion in market value of casino companies last year, investors still need to exercise caution, according to Fischer.

“While we think that the sector is relatively inexpensive now on valuation ground, most investors will prefer to wait until they see the worst of the news flow,” he said.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE