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Some Macau game operators to benefit, but entire sector still under pressure

PUBLISHED : Thursday, 19 November, 2015, 10:49am
UPDATED : Thursday, 19 November, 2015, 11:41pm

Macau’s gaming operators including Sands China and Galaxy stand to benefit from the chief executive’s decision to support integrated resort development, Jefferies’ analysts said, while the whole industry, especially players engaged in the high roller business are not expected to recover anytime soon.

Macau’s Chief Executive Fernando Chui said on Tuesday that the government would put more efforts to diversify the local economy and accelerate building the city into a travel and leisure destination in the world, as he delivered proposals for the next year to local legislators.

“One bright spot for the gaming sector from the policy address is that the government will push for (the) large integrated resort model for gaming operators and encourage more travel and leisure related non-gaming projects,” Jefferies said in a note.

“The government is pursuing more mass related business and targeting to change Macau to an international travel destination instead of a casino hub…We believe Galaxy, Sands China and Melco Crown are well-positioned to benefit from the policy.”

They noted VIP business should remain challenging, after the authority issued an internal instruction to regulate the junket sector in October after the Dore’s incident. There will be further rules to regulate the junket system and VIP operations.

Hong Kong-based investment bank Daiwa Capital Markets published a report in September saying as much as HK$258 million had been stolen from a junket named Dore operating inside Wynn Macau.

Nomura’s analysts said in note issued on Wednesday that “Macau, especially VIP Gaming, is not out of the woods yet”.

They forecast Macau will experience three consecutive years of falling gross gaming revenues (GGR), specifically, 3 per cent lower in 2014, 35 per cent down in 2015, and 8 per cent lower in 2016.

“We think it is too early to start accumulating growth names like MGM or Wynn. We recommend investors focus on the more defensive Macau names. We maintain a Buy recommendation on Sands China with 25 per cent potential upside and a 7.3 per cent dividend yield.”

Macau’s CE Chui forecast casino revenue to come in at 200 billion patacas next year .

Gaming operators in Macau have been facing headwinds since early 2014, as the economic slowdown in the mainland, and more importantly, the anti-corruption campaign by Beijing sharply pruned the number of VIP clients.

Revenue from this sector had been falling by 30 to 50 per cent monthly year-over-year since early 2014, according to government figures.

Investors’ sentiment slightly recovered since last month, as October’s gaming revenue of 20.04 billion patacas, marks a significant improvement on September’s 17.16 billion patacas, although the year-on-year figure still represented a 28.4 per cent drop.

Share prices of major gaming operators including Galaxy, Sands China, Melco Crown Entertainment, MGM Resorts, and Wynn Macau all saw a strong rebound in early October which then stalled later.

Deutsche Bank analyst Karen Tang said in a research note last week that the optimistic sentiment would “soon run out of stream”.

“Macau stocks have rallied over 20 per cent since October 1st on optimism towards potential supportive policies...Current share prices have factored in a mild GGR recovery in 2016…however we think the new policies will not be able to stimulate GGR as we see Macau’s problem as demand-driven instead of supply-(or visa-) constraints.”

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