Too early to be bullish on Macau, Morgan Stanley says

Morgan Stanley says it’s too early to be bullish on Macau casino stocks and that the bottom isn’t likely to be until the first quarter of next year.
The U.S. investment bank said casino stocks have been rallying recently on expectations that the 23.2 percent drop in gross gambling revenue in October marked the bottom of the cycle, with most of the bad news already priced into shares.
It says that in the previous two downward spirals, in 2008 and 2012, the share prices bottomed out at the same time as GGR troughed. It expects Q1 to be the worst quarter, mainly because of the base effect, with 2013 being the best quarter ever.
It says GGR is likely to pick up from Q2, helped by new supply additions.
Macau’s GGR has fallen in each of the past five months, with the October drop the worst on record. China’s clampdown on corruption has led to a sharp drop in VIP spending amidst concern about extravagant displays of consumption. The mainland’s economy and stock market have also been cooling, dragging on spending power, while travel restrictions are also taking their toll.
Morgan Stanley says the market could worsen if growth in the mass market were to slow to zero or turn negative. It also says there is likely to be margin pressure due to the hiring of as many as 8,000 workers for new resorts in Cotai before opening. That may cut the gross EBITDA margin by about 3 percentage points, it said.
While the labor costs are well understood, it said a shortage of dealers and lower table allocation could be negative for the first-year EBITDA estimates of the phase 2 casinos.
However, on the upside, it says leading macro-economic indicators in China are pointing to an improvement in the VIP sector in the next six to nine months.