Risks Rising In Gaming Industry

BMI View: Macau gaming revenue growth continues to slow. Further weakness is likely as junket operators come under increased scrutiny from regulators, with local casino stocks clearly pricing in a more subdued revenue outlook over the coming quarters.

Since our previous article on the ongoing slowdown in Macau's gaming industry and overall economy ( see 'Warning Signs For Liquidity Boom', February 10), the Special Administrative Region (SAR) has witnessed further signs of weakness in its crucial VIP gaming segment. Although gaming revenues came in at a solid MOP31.3bn (USD3.92bn) in April, which marked a 10.6% y-o-y increase, the slowdown in momentum is evident in the accompanying chart. Furthermore, as junket operators (organisation who arrange credit lines for VIP gamblers) come under increased scrutiny from regulators, the tide is turning against the highly-lucrative industry. A recent high profile arrest of a large shareholder of a Macau junket operator in March and the disappearance of another junket investor in April has dampened sentiment in the high-roller segment, which accounts for roughly 70% of total gambling revenues, and we are likely to see further declines in revenue growth over the coming months.

The combination of ongoing tightening of liquidity in mainland China, and heightened efforts by regulators to make the industry more transparent and cut down money laundering activities, is likely to see gaming revenues continue to decline. The slowdown in revenues also comes at a time when capacity is on the rise, as the enclave will see the opening of eight new resorts over the next three years, and competition from the likes of the Philippines increases.

Waning Momentum
Macau - Total Revenues, Games Of Fortune

BMI View: Macau gaming revenue growth continues to slow. Further weakness is likely as junket operators come under increased scrutiny from regulators, with local casino stocks clearly pricing in a more subdued revenue outlook over the coming quarters.

Since our previous article on the ongoing slowdown in Macau's gaming industry and overall economy ( see 'Warning Signs For Liquidity Boom', February 10), the Special Administrative Region (SAR) has witnessed further signs of weakness in its crucial VIP gaming segment. Although gaming revenues came in at a solid MOP31.3bn (USD3.92bn) in April, which marked a 10.6% y-o-y increase, the slowdown in momentum is evident in the accompanying chart. Furthermore, as junket operators (organisation who arrange credit lines for VIP gamblers) come under increased scrutiny from regulators, the tide is turning against the highly-lucrative industry. A recent high profile arrest of a large shareholder of a Macau junket operator in March and the disappearance of another junket investor in April has dampened sentiment in the high-roller segment, which accounts for roughly 70% of total gambling revenues, and we are likely to see further declines in revenue growth over the coming months.

Waning Momentum
Macau - Total Revenues, Games Of Fortune

The combination of ongoing tightening of liquidity in mainland China, and heightened efforts by regulators to make the industry more transparent and cut down money laundering activities, is likely to see gaming revenues continue to decline. The slowdown in revenues also comes at a time when capacity is on the rise, as the enclave will see the opening of eight new resorts over the next three years, and competition from the likes of the Philippines increases.

Topping Pattern
Galaxy Entertainment Group Share Price

Equity Weakness Showing No Signs Of Abating

We have been monitoring local gaming stocks over recent years for signs that the gaming boom in Macau could be coming unstuck, and some of the equity charts suggest that a weaker earnings picture lies ahead for the local casino operators. Galaxy Entertainment Group and MGM China Holdings are both 30% off their respective peaks, while Wynn Macau's stock has fallen a slightly more modest 20%. The technical chart of Galaxy suggests much steeper losses lie ahead, given the bubble-like parabolic move in the stock and the 150x increase in the company's market capitalisation over the past five years.

Local authorities and mainland Chinese officials are keen for Macau to diversify away from VIP gaming and towards broader entertainment offerings to attract a wider visitor base. There has been some progress on this front in recent years. The proportion of gaming revenues from high rollers has fallen in recent years, with mass market casino revenue growth far outstripping VIP revenue growth over the past year. Given the vast amount of resources available to the Macau government, which ran a fiscal surplus of 23.8% of GDP in 2013, we believe diversification efforts will be successful, and the broader economy will prove to be well-insulated from further weakness in the VIP segment. That said, the days of double-digit real GDP growth are likely behind us.

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