FITCH RATINGS | Revenue growth estimate lowered due to VIP softness

Fitch Ratings has lowered its 2014 Macau revenue growth estimate to 10 percent from 12% due to weakness in the more volatile VIP segment. According to the rating agency, the VIP weakness caused the overall market to realize its first negative monthly comp (negative 3.7% in June) in five years.
“YTD though June, Macau revenues are up 12.6%, which is still above our initial full-year forecast of 12% in place since December 2013. While some weakness can be attributed to the World Cup and low hold during June, VIP softness has continued into July. We also believe VIP is being affected by the reallocation of tables toward the low-yield, high-margin mass market table games. Mass market continues to grow at above 25%,” Fitch stated in a report released yesterday.
Assuming low single-digit declines in VIP and 25%-30% mass growth for the remainder of the year, “full-year revenues will come in at around 10%. Mass market will continue to be supported by longer-term drivers such as improved transportation infrastructure and growing middle-class in China, while VIP is more sensitive to macroeconomic factors in China.”
The rating agency points out that the Chinese government recently indicated that “they will likely not employ an all-out stimulus, but will instead take a more measured approach (including providing access to financing and investing in infrastructure) to keep broader economic growth at around 7.5%.”
Fitch describes Macau officials’ clarification on the POS machines policy, according to which existing machines in jewelry and pawn shops located near or in casinos will continue to process UnionPay transactions but will face a temporary moratorium on adding new machines. For the rating company, “it appears that the prior concerns regarding UnionPay machines will not be a major issue.”
Another overhang is an almost full prohibition on smoking which will come into effect this October. “We do not expect a significant change in visitation and think comparisons to markets such as Illinois are inappropriate given the lack of other convenient options for Chinese and Hong Kong nationals. That said, there could be some marginal impact on the mass side, as the time spent at the tables could be diminished (private rooms will have smoking),” Fitch states.
The revenue forecast reduction was discussed in Fitch’s “Gaming, Lodging and Leisure” electronic newsletter. MDT