Morgan Stanley: Macau gaming market yet to bottom out

The latest results for Macau’s gaming revenue have brought a ray of hope to investors and some analysts that the market has finally bottomed out after 13 consecutive months of decline. The announcement of the transit visa relaxation is perceived as another sign of optimism in the territory. Investment bank Morgan Stanley, however, says the bottom has yet to arrive. In fact, the report by analysts Praveen Choudhary, Alex Poon and Thomas Allen cuts gross gaming revenue forecast for this year further to a decrease of 34 per cent, while the previous prediction posited a 26 per cent fall. For the American investment bank at the moment there are two key risks that can hit the industry, and mainly the VIP segment: reduction in margins and increasing costs. “Although the number of hotel guests has picked up in the last three months this was mainly caused by sharp cuts to hotel room rates for incremental customers who have lower spending power”, the analysts wrote. According to the report, room rates in March decreased 2.5 per cent year-on-year, while in May the decline reached 4.7 per cent. “Not only does this reflect the deteriorating quality of customer, it also implies lower non-gaming EBITDA [Earnings Before Interest, Taxes, Depreciation and Amortization]”. The Morgan Stanley report also stressed that the VIP roll also hit the lowest value in June 2015 (down 53 year-on-year) since October 2009, which is causing junkets to struggle to maintain liquidity and profitability. Fixed costs and Oversupply underappreciated One of the main points of the report released yesterday is that investors are too focused on weekly revenue data, “while the increase in fixed costs from oversupply and impact on EBITDA and margin” are played down. In the eyes of Morgan Stanley’s analysts staff costs are expected to increase 15 per cent this year, 18 per cent in 2016 and 31 per cent in 2017. This is explained by a 5 per cent compound growth of wages plus an extra 7,000 new staff per casino. At the same time, by 2018 table growth is expected to increase roughly 20 per cent and casino hotel rooms by 50 per cent. If these two facts are not perceived as negative alone, the fact fixed costs associated with those increases are “likely to grow by a similar magnitude” bring extra risks to the sector. Concerning relaxation of the transit visa Morgan Stanley believes its impact will be limited because the problems for the industry arise from “revenue decline rather than transit visa restrictions.”