Casino Crash | Daiwa sees 7 pct decline in 2015 gaming revenues

Pedestrians cross an intersection in front of the Casino Grand Lisboa, operated by SJM

Daiwa Securities gaming analyst Jamie Soo predicts that Macau’s Gross Gaming Revenue will decline by 7 pct next year, foreseeing a decline in all three gaming segments. For VIP play, “prevailing segment weakness will be the norm in 2015, largely affected by junket liquidity issues, China’s anti-corruption drive, plus transit visa restrictions. For the ‘Premium Mass’ segment, largely it’s the same negative vibes as VIP; looking at reduced frequency of visits and also a decline in spend. Soo said that it’s “a worrisome trend” that at the bottom gaming tier, ‘Grind Mass,’ there will be a “structural shift to lower-spending tourists; a divergence between record-high rising tourist arrivals and falling mass revenue growth.
“For us, given the October numbers we saw in Golden Week, it’s especially telling; negative 8 pct decline in gambling revenue with a 17 pct growth in tourists booked,” Soo said during the Daiwa Investment Conference 2014 press briefing on Wednesday in Hong Kong. Daiwa forecasts a decline in mass sector GGR growth from 17 pct to 7 pct for the last quarter of 2014 and more negative growth in VIP and overall play; from –19 pct to -30 pct and –7 pct to -17 pct. Soo forecasts upward trends through 2015 to 2016 with both the latter segments climbing out of negative growth, 2015 seeing overall GGR growth back to the 2014 Q4 level, with the mass sector up from 7 pct to 11 pct and VIP sector up from -30 pct to -19 pct. He expects 2016 to see those figures rise to overall from -7 pct to 5 pct with the mass segment rising from 11 pct to 12 pct, while VIP is expected to recover from -19 pct to 0 pct growth.
For Soo it’s the end of the era of gaming-driven growth. “The build-it-and-they-will-come mantra is no longer a valid investment thesis, and operators with new property openings are likely to see downside risks, particularly in execution which will be negatively impacted. In terms of sector pressures we should see wage inflation, declining table yields, pre-opening hiring and increased competition. These cost pressures will be going forth into 2015; not only a decline in revenue, but an increase in costs.”
Daiwa stock picks for Macau gaming are SJM and MGM because “they are opening in 2016 and 2017, shielding them from the pre-hiring and staff costs increases we’re expecting in 2015,” said Soo.
In terms of China’s prospects, the heavyweight Japanese investment firm’s senior economist in Hong Kong, Kevin Lai, warned that he predicts 6.9 pct growth in the economy as long as the Fed funds don’t dry up, and that interest rates of 1 pct or 2 pct would be manageable. He also expressed concern about the years of massive liquidity inflows (USD1 trillion since Quantitative Easing 1), via carry trade, and disguised FDI which if reversed, as has begun, could see increasing capital outflow, magnified by the multiplier effect as the inflows were. Daiwa expects a negative balance of payment for China in 2015, down from a decade of hundreds of millions of US$ surplus (excepting 2012).
However, there are investment bright spots on the mainland for 2015 in mobile Internet and e-commerce, according to Daiwa’s, senior Internet analyst for Hong Kong, John Choi. He predicts many rural users will leapfrog to smartphone use with industry leaders Tencent, Alibaba and Baidu, who are “well-positioned with various monetization initiatives, heavily investing to promote their online/offline integration.”
Choi also predicts another surge in e-commerce growth, after a doubling in the past three years. Again Baidu and Tencent, as well as online discount company Vipshop, are set to benefit from still low online e-commerce usage and “big willing-to-spend consumer base, emanating from lower-tier cities, the next growth engine for the sector, according to Choi. Robert Carroll, Hong Kong