WORSE TO COME

2014/11/10

From：Macau Business Daily

Morgan Stanley is swimming against the tide. Industry consensus is that gaming revenue hit bottom in October. But the U.S. bank says hold on a minute. They predict double-digit declines in revenue until the second quarter of 2015.

It came as a shock. October gaming revenues dropped 23.2 percent, more than investors forecast and the worst decline since the casino sector had been liberalised in Macau. For the majority of investors, the market had reached bottom and casino stock prices already incorporated the bad news. Thus recovery, even if timid, was probably under way. But maybe not.
For Morgan Stanley, it’s too soon to let off the fireworks. Macau’s gaming crisis is still going to get worse and last until the second quarter of 2015 with double-digit declines in revenues likely to remain for some months. ‘The market has rallied with a view that October is the worst revenue decline and that most of the bad news is already in the price. We disagree’, the bank wrote.
Failed estimations have been more the rule than the exception this year. In January, banks and brokerages said gaming revenues in Macau would increase 15 to 20 percent in 2014. In June, when the drop here started, investors said casino revenues would rebound around September or October in a worst-case scenario. The story is now known: October was the worst month ever, while gaming revenues in 2014 will not grow the predicted 20 percent but drop by more than 5 percent. At least.
In a report released last week, Morgan Stanley warned its clients that the Macau gaming industry would only reach bottom in terms of revenues, profits and stock prices in the first quarter of 2015. This means that casinos and gaming investors have to face three to six more months of negative headlines.
Between June and October, the casino industry and the government (which receives 35 percent of all gross gaming revenues) saw revenues slashed by MOP16 billion and MOP5.6 billion, respectively, compared to the same period last year, according to Business Daily calculations. If Morgan Stanley is right, many more billions are at stake in the upcoming months.
The US bank believes Macau’s market will bottom only at the beginning of next year for several reasons. First, in the previous two crises (the downturns of 2008 and 2012) casino stock prices bottomed at the same time as revenues and profits, contrary to consensus that says shares tend to anticipate downturns and recovery of companies. ‘Stocks could start falling from mid-November and bottom in January’, wrote Morgan Stanley.
Second, the next two quarters will bring even more negative news for the gaming industry. The last quarter of the year will see mass revenues turn flat and the VIP segment decline 32 percent from a year ago. But worse has yet to come in 2015. Because of base and comparison effect (the first quarter of 2014 was the best ever in Macau in terms of revenues) the first three months of next year will cascade negative figures. According to Morgan Stanley estimations, mass revenues will decrease for the first time (5 percent) while total revenues are set to diminish 22 percent.
Following which, the basis for recovery could be in place. The new openings from Melco Crown and Galaxy in 2015 are likely to attract new customers to Macau, while the comparison effect will also be more favourable.

Copyright@Macau Business Daily