Gaming revenues could drop by double digits until early 2015

2014/9/17

From：Macau Business Daily

Morgan Stanley says the industry here will face a new round of downward revisions for revenue and profit growth. Less revenues and increased staff costs could be an explosive mix for operators.

The drop in Macau’s gaming revenues will continue to accelerate through the rest of the year and is unlikely to recover before the start of the second quarter of 2015, opening doors for further downward revision for casino profits in Macau, Morgan Stanley said yesterday.
In a note to clients, Morgan Stanley predicts that gaming revenues here will decrease 4 percent in the third quarter compared to the same period last year. In September, revenues are set to drop 10 percent.
Until the Spring of next year, the gaming industry in Macau will face some hard times with revenues dropping by double digits. According to the US bank’s estimates, revenues will fall by 14 percent in the last quarter of 2014 and a record 16 percent in the first three months of 2015, both on a year-on-year basis.

Turbulence

Only then will operators’ revenues turn and start to improve as the wave of new openings in Cotai adds more capacity and, hopefully, attracts more gamblers. For the second quarter of next year, gaming revenues will still drop by 6 percent before returning to positive territory.
Morgan Stanley says that the average growth of revenues for 2014 and 2015 will hover between 3 and 4 percent. With diminishing revenues, gaming operators will suffer some turbulence on the stocks front and some damage to profits.
Morgan Stanley also underlines that profit growth could continue to lag if staff costs increase ahead of the first openings in Cotai of Galaxy and Melco Crown Entertainment. ‘We view consensus revenue growth of 9 percent for 2014 and 14 percent for 2015 as too high and needing to come down. This could drive industry multiples above long-term averages and thus valuation does not look compelling despite underperformance year to date’, wrote the bank to clients.
The causes for the downturn include the usual suspects. In the VIP segment decline is driven by the junket liquidity shortage, property sector downturn and transit visa restrictions affecting junkets and agents. The opening of Phase 2 in Cotai, once heralded as a path to the recovery of the VIP segment, ‘is unlikely to bring growth back to VIP in view of growth saturation and lagging demand’, Morgan Stanley wrote. In the mass segment, events like the smoking ban set to start in October, transit visas and limited hotel rooms are the main headaches for operators.

The real problem

However, Morgan Stanley notes that labour shortage is the ‘obvious and quite serious issue’ in Macau. Operators will need an extra 6,000 to 8,000 new workers for the new casinos in Cotai. In addition, recent strikes and employee demands have already increased staff costs by 10 percent annually. This could be an explosive mix for the gaming companies in Macau as revenue growth is slowing down while staff costs could cause a ‘severe margin pressure’ in profits.

Copyright@Macau Business Daily