Macau’s six casino operators will begin reporting Q2 results later this month, with analysts expecting a mixed bag. Though operators say they are seeing signs of stabilization in the market, that is unlikely to be reflected in the bottom line, at least for now.
The general consensus is that revenues and EBITDA will fall quarter over quarter (QoQ) to the lowest in the past five years. Decline is expected to be driven by a significant dip in VIP business, but contributions from the mass market are also thought to be down. A number of factors are at play – from the opening of Shanghai Disneyland to the European Football Championship – but despite the rough waters analysts remain confident in the long-term potential of the market.
According to a research note issued by Morgan Stanley, total GGR for 2Q16 will be around $6.5 billion, down 8 percent QoQ and 9 percent year over year (YoY), while industry EBITDA is expected to fall 6 percent QoQ to $1.34 billion with a flattish margin. VIP revenue is thought to have fallen 12 percent QoQ and 20 percent YoY to $2.9 billion, while mass market contributions are expected to be up 4 percent YoY, but down 3 percent on a sequential basis to $3.1 billion.
Macquarie Securities forecasts that Q2 GGR fell 9 percent YOY and 8 percent sequentially to $6.47 billion.
“However, the recent change in the mix (VIP/Mass), as we saw in the last few quarters, in our view, will help margins for most of the operators,” said Macquarie analyst Chad Beynon. “More importantly, we expect premium mass, which represents more than 50 percent of the overall mass market, to maintain healthy margins.”
One of the key trends emerging from the quarter is the ongoing decline in VIP business, and the need for operators to focus on the mass market. “I think the Q2 results will show the VIP segment continues to be under pressure with operators all trying to focus on mass gaming, hence they will try to differentiate among each other in terms of product offering and service,” says Michael Ting, of CIMB Securities. “To this extent, Sands is best positioned in terms of its properties having mass gaming appeal. I think SJM and MGM will be hurt the most as these two operators do not have a property on Cotai,” he adds.
The most recent factor affecting VIP revenue has been the ban on telephone betting, which came into effect on 9 May. Morgan Stanley estimates that up to 10 percent of Macau’s VIP business came through the channel, so is a major loss to operators. Other factors include the Euro Football Championship, which ran from June 10 – July 10, and the opening of Shanghai Disneyland, which has likely impacted the mass market too. Indeed, in its report, Morgan Stanley raised concerns about the opening leading to a lower frequency of visits to Macau, overlapping customers, and similar spending per capita of visitors.
Its AlphaWise Survey in June found that 30 percent of Chinese gamblers in Macau would visit Macau less after the Disneyland resort opened. According to Ctrip, the resort will draw around 7.3 million visitors this year, with 60 percent of them coming from outside of Shanghai. Ctrip also estimates that average spending per capita of Chinese visitors in the resort to be $330, similar to the $356 spent (non-gaming) by overnight Chinese visitors in Macau. But Marcus Liu, regional gaming analyst at CLSA, believes the impact will be less severe.
“We’d expect there to be a minor negative impact from Shanghai Disney. Most visitation to Macau comes from neighbouring provinces and Shanghai is far. However, the number from Shanghai and its neighbouring provinces, who might have visited Disney instead of Macau, isn’t zero so there is some impact. That might have caused the slight fall in mass this quarter,” he adds.
It’s also important to highlight the expected shift in market share, with the casinos located on Cotai gaining a larger slice of the pie. The reason for this is that the casinos in Cotai are newer than the legacy casinos on the Peninsula, and feature more restaurants, retail and entertainment. And as Macau slowly evolves into more of a destination for things other than gaming, customers are likely to be drawn more to Cotai as new properties, such as the Wynn Palace and Parisian Macau, open their doors.
As such, the focus will be very much on the second half of the year when the two properties are expected to open. “2Q16 is likely to be a throwaway quarter as investors focus on 3G16 given that both the Wynn Palace and Parisian Macau will open in August and September respectively,” says Grant Govertsen, managing director at Union Gaming Securities. “These two openings will likely be the key to whether or not Macau gaming stocks rally. If Wynn Palace and Parisian Macau are able to grow the market, which we think they should, then we would look for institutional investors to enter the market in a big way,” he adds.
Macquarie’s Beynon said: “We believe the next six months are the most critical times to analyze the Macau market and draw a 3 to 5-year conclusion on the fundamental growth and if the additional supply will be absorbed in a positive way.”
Sands China: Sands has a market share of around 30 percent in the mass segment. But Morgan Stanley expects a 5 percent QoQ decline in EBITDA during the period due to a 4 percent QoQ decline in its mass business. Sands has weaker junket VIP contributions compared with other operators, but this could be offset by better direct VIP trade. The opening of the Parisian in mid-September is seen as a key catalyst for continued growth. According to Capital IQ, the market consensus is for EBITDA of $545.4 million. Beynon said the company is the best placed in a slow-growth environment, though it is carrying extra costs ahead of the opening of The Parisian which may “put a ceiling on margins.”
Wynn Macau: Wynn EBITDA growth could underperform the sector, declining 7 percent QoQ to $153 million, says Morgan Stanley. This is due to its high exposure to the VIP market, which represents 25 percent of the company’s total EBITDA. That said, cost savings of around $25 million a quarter from transferring 1,700 employees to the Palace should be visible from 3Q16 onwards. Capital IQ sets the market consensus at $168.3 million. Beynon says, as with Sands, pre-opening costs may weigh.
Galaxy Entertainment: EBITDA is expected to fall 7 percent to $291 million mainly due to StarWorld EBITDA falling 15 percent during the period as Peninsula casinos continue to lose market share to those on Cotai. But there are upsides; Morgan Stanley expects Galaxy to remain resilient, with the opening of the first Macau Apple store benefiting foot traffic, non-gaming and mass market business in the second half of the year. The market consensus is for EBITDA of $294.3 million.
Melco Crown Entertainment: Could report better than market EBITDA growth of 1 percent QoQ to $222 million, but that is only because of one off bad debt of $18 million related to Altira in 1Q16. Excluding that, Morgan Stanley estimates EBITDA would have fallen 6 percent QoQ. Growth was also driven by City of Dreams Manila, which saw EBITDA increase $10 million or 37 percent QoQ. Further upsides include the potential opening of VIP rooms in 3Q16 at Studio City, but these could be cannibalized by the opening of two mega casinos, Wynn Palace and Parisian Macau, during the same quarter. The market consensus is for $223.5 million.
SJM: Morgan Stanley expects EBITDA to decline 10 percent QoQ to $90 million, driven by a 15 percent and 5 percent decline in VIP and mass market revenues ($617 million and $631 million) respectively) during the three-month period. On average analysts expect EBITDA of $98.5 million.
MGM China: EBITDA is expected to fall 7 percent QoQ to $119 million with the decline driven by a 5 percent decrease in mass market and 12 percent decrease in VIP revenue. The consensus is for EBITDA of $117 million.
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