MACAU

Bright future seen for gaming growth

Despite short-term headwinds from China’s slowing economy and trade friction with the U.S., analysts remain optimistic Macau will retain its crown as Asia’s top gaming hub.

According to analysts at Jefferies, who recently initiated coverage on the territory’s six operators, tax cuts in China, credit easing and China’s migrant salary ‘hump’ will be the next drivers for gaming growth.

“Mass market will continue to outpace VIP with the Chinese outbound tourism market still untapped and still under-penetrated – only 11.6 percent of the population traveled abroad last year. Look for the next wave of potential Chinese travelers as another 240 million workers hit the income distribution salary hump within the next 7 years, which previously took 20 years,” it said in a research report.

“Individuals surpassing the RMB3,500/ month personal income threshold (currently around 238 million people) will be a key driver for future visitations,” said the analysts.

The brokerage is also optimistic on economic policies in China that will boost the VIP gaming market in the second half of the year, such as recent personal tax cuts, credit easing, SOE-funded value added tax cuts, and a further cut in the Reserve Required Ratio, which stipulates the ratio of cash that banks need to hold in reserve.

Looking at 2019, Jeffries said it is forecasting a 1.1 percent increase in gross gaming revenue – led by a 6.5 percent increase in mass, and a 5.6 percent GGR increase in 2020, led by a 3.7 and 7.8 percent increase in VIP and mass respectively.

Analysts at Morgan Stanley expect the market cap of Macau’s operators to double by end-2022, driven by improving infrastructure and higher multiples.

They predict GGR will reach US$50 billion by 2022, up from US$38 billion in 2018.

Morgan Stanley said it believes the industry’s market cap could grow to US$200 billion in 2022, doubling the current value.

“Along with the opening of HZMB in October 2018 and the high-speed rail extension to Hong Kong, we expect increased visitation potential from China’s lower-tier cities. With the recent license extensions for SJM and MGM, the risk of license renewal has also declined.”

That being said, analysts’ bullishness could be impacted should there be disruptions related to licenses and regional competition – even though the chances are low.

One area of potential high-end GGR stabilization and renewed strength may come from a recovering credit cycle in China which may support VIP recovery in H2.

“In March 2019, the concessions for SJM and MGM were extended to June 2022 (the same as the other four concessionaires). Both companies paid US$25 million to the government and MGM paid MOP20 million to SJM. This confirms to us that the license risk is overblown, and while there will be a rebidding process before the June 2022 expiry, it is unlikely that any of the six operators will lose their licenses or have to pay significant renewal fees.”

For Q1, VIP baccarat revenue fell nearly 13.4 percent year-on-year, reaching MOP37.2 billion, according to data from the Gaming Inspection and Coordination Bureau.

The fall in VIP revenue was the main contributor to the slight fall in Q1 GGR, which dropped 0.5 percent year-on-year to MOP76.2 billion in the quarter.

Mass GGR growth, however, held up well, growing 16.1 percent year-on-year to MOP38.9 billion. Mass baccarat increased 19.5 percent year-on-year in the quarter.

Analysts from Bernstein said that GGR growth deceleration in the quarter wasn’t as bad as initially anticipated.

They noted that continuing weakness in China’s economy, slow credit growth in the second half of 2018 and tough year-onyear comparisons had all taken their toll in the quarter. A smoking ban that came into effect in January is also having an impact.

Bernstein said it expects the year-onyear comparison to remain tough until the end of April and May, and begin to ease in May/June.

“One area of potential high-end GGR stabilization and renewed strength may come from a recovering credit cycle in China which may support VIP recovery in 2H,” said the analysts.

For individual operators, Bernstein said it expects MGM China to show the highest year-on-year GGR growth from the opening and continued ramp-up of MGM Cotai (opened in February 2018), followed by Sands China, due to an overall shift in business mix to mass.

Melco and SJM both face difficult y/y comparisons, while Galaxy and Wynn Macau both suffered from the declines in VIP volumes.

Wynn Macau

Wynn Macau (1128:HK) operates two resorts, with its $4 billion Wynn Palace opening in 2016. The company’s original property is on the Macau Peninsula. The Wynn Palace has 1,700 hotel rooms and 90 percent of the resort will be non-gaming. The resort has two further plots of land available for development and the company is considering adding more non-gaming attractions.

The board recently proposed a ban on founder Steve Wynn from entering any of the resorts that he designed. Wynn was ousted from his position last year following allegations of sexual misconduct. The group is competing for a license in Japan where it says it will build the world’s largest IR if successful. Total operating revenues from Wynn Resorts’ Macau operations grew 15.7 percent in the year ended Dec. 31, 2018, driven mainly by improved results at Wynn Palace. Operating revenue from Wynn Palace grew 35.8 percent to US$2.8 billion in the full-year 2018, however, operating revenues from Wynn Macau fell 1.8 percent to $2.3 billion.

Galaxy Entertainment Group

Galaxy Entertainment Group (27.HK) has three main properties and runs three City Club casinos inside hotels. The company’s Galaxy Macau Phase 2 and Broadway at Galaxy Macau opened on May 27, 2015, almost doubling the capacity of the resort. The company has the largest contiguous land bank in Cotai and intends to expand its non-gaming footprint with Phases 3 & 4 of the resort.

The group posted net revenue of $55.2 billion in 2018, up 14 percent year-on-year, and generated adjusted EBITDA of $16.9 billion, up 19 percent.

MGM China

MGM China (2282:HK) is operating two casinos, with its MGM Cotai IR opening in February last year. The HK$27 billion IR features 1,400 hotel rooms and suites, meeting space, high end spa, retail offerings and food and beverage outlets as well as the first international Mansion at MGM for the ultimate luxury experience.

In Q1, gross gaming revenue grow by 18 percent year-on-year, with growth seen across all gaming segments.

Main floor table games win reached HK$3.5 billion, increasing 35 percent, due to a full quarter of operations at MGM Cotai, along with the addition of new tables and higher win percentage.

VIP table win also grew 3 percent, outperforming the market significantly (which declined in the quarter), due mainly to the opening of VIP junket rooms in the second half of 2018.

Slot win increased 12 percent to HK$537 million, also outperforming the market.

SJM Holdings

SJM Holdings (880:HK) has 22 casinos in Macau, though the former monopoly has been losing market share to new IRs on Cotai. The opening of its $4.6 billion Lisboa Palace resort is expected in the second half of this year and the company said it’s confident it can provide a differentiated offering from its competitors.

On completion, the Grand Lisboa Palace will create over 8,000 jobs and provide career advancement opportunities for current local employees.

In Q1, profit rose 16.5 percent over the prior year to HK$850 million ($108.3 million), driven by mass market revenue.

VIP gross gaming revenue in the period dropped 19.4 percent to $3.93 billion, while mass market revenue grew 7.9 percent to $6.19 billion. Slot machine gross gaming revenue was HK$290 million, a decrease of 1.3 percent.

Total net revenue increased 0.7 percent to $8.65 billion.

Analysts at Bernstein Research said the results had come in above its estimates on the EBITDA level, partly because of a high 3.2 percent hold.

Sands China

Sands China (1928:HK) has five properties in Macau. It is upgrading its Sands Cotai Central property to a London-themed resort. The company currently has 12,000 hotel rooms and suites, making up for 48 percent of hotel rooms run by casino operators in Macau. According to analysts at Bernstein, Sands will remain the market leader in the mass sector and in nongaming for at least the next five years.

“Sands China is the clear market share leader in Macau. Coupled with its hotel room capacity, Sands China is well-positioned to continue to capitalize on Macau’s continued paradigm shift from VIP to Mass,” it wrote.

Record mass table revenues of $1.5 billion helped to boost total net revenue for Sands China in Q1 with an 8 percent year-on-year gain to $2.3 billion. In Macau, adjusted EBITDA reached $858 million, an increase of 9 percent over the prior year, and beating consensus estimates by around 5 percent.

Melco Resorts & Entertainment

Melco Resorts & Entertainment (6883.HK) has three casinos and the Mocha Clubs. The company operates the City of Dreams and Studio City in Macau and the City of Dreams Manila. The group’s Morpheus Hotel, which opened last year, was named as building of the year for 2019 by readers of ArchDaily, the world’s most visited architecture website.

For Q4, the company reported net revenue of US$1.39 billion, representing an increase of approximately 5 percent. Adjusted property EBITDA was $425.2 million up 25 percent, helped by an improved in both rolling volume and mass revenue.

Ho lat-Seng tipped as next Macau CEO

It is becoming increasingly likely that Macau legislative chair Ho Iat-Seng will become the next chief executive of Macau after announcing his intention to run for the position.

A respected business leader, Ho entered politics in 2000 as a local deputy to China’s legislature, the National People’s Congress. In 2009, he was expected to become the chief executive, but decided to run for the legislature instead.

He is expected to be the sole candidate for the city’s election in August after announcing his intention to run.

Earlier this year, risk advisor Steve Vickers warned that the new chief executive would be able to influence the fate of Macau’s current gaming concessionaires.

Government to launch tender process before 2022

Macau chief executive Fernando Chui Sai On has confirmed the government will launch a public tendering for gaming licenses prior to the current expiry of 2022.

The chief executive did not give any timeline. Analysts say the criteria for the concessions would likely include commitments on non-gaming offerings, improved labor rights or working conditions for the employees, along with others.

The Macau government has extended the licenses of SJM and MGM to June 26, 2022, following requests from both operators to bring them in line with the expiry of the other licensees.

“The extension granted to the two companies was also deemed helpful for the maintenance of social stability, particularly the stability of the job market,” Leong said.