Casinos balance customers against costs

As Macau’s gaming revenue flattens out after fluctuating around this month’s National Day “golden week” holiday, views differ on the sector’s prospects and who is poised to cash in on a rising mass market while containing development costs.

Last week’s gross gaming revenue was HK$3.8 billion, with an average daily rate of HK$540 million. That’s the same daily rate as September’s average, a year-on-year decline of 32 per cent, Daiwa analysts said.

The week-long holiday at the start of October supplied a boost, but despite an increase in visitor numbers, gaming revenue for the week was down 30 per cent compared to the same week last year, according to Morgan Stanley. It also created a hangover effect the following week, from which last week’s result was a 21 per cent rebound.

With a casino smoking ban having come into effect from October 6, visa restrictions for mainland visitors, a crackdown on money flows through UnionPay, and a junket industry facing increased scrutiny and declining liquidity, the headwinds look daunting.

But analysts see buying opportunities. With the casino sector heavily discounted after underperforming the Hang Seng Index throughout the year – including by 9 per cent in September – stocks like Galaxy Entertainment were “too cheap to ignore”, Morgan Stanley analysts wrote in an October 9 report.

And, pointing to a relaxation of transit visa rules and reconsideration of the smoking ban for VIP rooms, Jefferies said the mood was improving. “We believe the policy headwind is largely behind us and expect the positive sentiment to drive the stocks,” equity analyst Leon Liao wrote in a report last week.

Last week, Macau’s Gaming Inspection and Coordination Bureau added further requirements on record-keeping and staff background checks to junket guidelines issued earlier this month, a move described by Daiwa as “incrementally negative to the sector”.

“We do not rule out the possibility of a potential renewed and accelerating junket attrition in the coming months … which implies a potential further leg down to VIP volumes in 2016,” Daiwa analyst Jamie Soo wrote in a note on Friday.

Against that bleak outlook, casinos are betting on the mass market, which has experienced a less dramatic decline. Its contribution to Macau’s total gaming revenue has increased from 39 per cent in the third quarter of 2014 to 47 per cent this year.

“Among the six operators, Sands China and Galaxy saw the most significant improvement in mass contribution to their respective total gaming revenue. We believe the trend will accelerate, especially for those with additional tables,” Liao said.

He also said the development of new attractions, hotels and transport infrastructure – including the Taipa Ferry Terminal due to open in mid-2016 – would attract more and longer-staying visitors, especially to the Cotai area. “We expect table yields in 2020 to return to levels seen in 2013,” he said.

But Soo said more facilities would not guarantee heightened demand, while Morgan Stanley noted that the cost of new developments “could surprise the market negatively”.

Analysts pick Galaxy Entertainment for its combination of strong financials, customer mix and market share. Sands China is also a pick, but its market share is vulnerable to Melco Crown Entertainment, which improved its mass and retail footprint this week with the newly opened Studio City.