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Cotai pipeline "worrisome," Deutsche Bank says

Deutsche Bank has revised down its Macau property EBITDA forecasts to between 9 percent and 12 percent for 2015 and 2016 due to margin pressure as fixed costs emerge, with the firm saying the pipeline of new openings on Cotai continues to be "worrisome."

Assuming fixed costs on a per room basis remain flat, DB expects the cost base of Macau to grow 4 percent year-on-year in 2015, 8 percent in 2016 and 20 percent in 2017, given the new supply. 

“Based on our current GGR forecasts, we estimate that aggregate Macau property level EBITDA on this level of “cost” inflation, will contract ~43% in 2015, grow ~2% in 2016, and contract again by ~11% in 2017.”

Relative to GGR forecasts, to merely offset the fixed cost increases each year, DB says GGR needs to be 120 bps better than its current estimate in 2015 of negative 32.9 percent compared with 34.1 percent. For the following year, GGR needs to be 370 bps better than its forecast for 2016, or negative 2.1 percent compared to an estimate of negative 5.8 percent.

“In April, ahead of the Galaxy expansion, we examined the Cotai pipeline and took a cautious view on the new openings, given the risks we believed they posed to market EBITDA. At the time, we noted that Consensus annual EBITDA forecasts appeared to be 25-30% too high, on average, through 2017.”

“While Consensus forecasts have subsequently been revised lower, with GGR forecasts continuing to trend lower, yet remaining too high in our view, we have updated our market EBITDA forecasts and continue to see meaningful risk to future Consensus property EBITDA.”

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