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 visitation,” 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 Stanely 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,” it said referring to the bridge that links Hong Kong, Macau and Zhuhai by road.
That being said, analysts’ bullishness could be impacted should there be disruptions related to licenses and regional competition – even though the chances are low.
“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,” Morgan Stanley notes.
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 fell 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-on-year 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-on-year 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 comparison, while Galaxy and Wynn Macau both suffered from the declines in VIP volumes.
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