FT report | V-shaped gaming recovery unlikely, Daiwa says

One of the most bearish analysts on Macau just got even more pessimistic.
Daiwa said it now predicts gross gaming revenue (GGR) in Macau to fall by 34 per cent this year, versus a January forecast for a 21 per cent decline. A new report says:
“From what we have seen on the ground in Macau, the market continues to underestimate the impact of liquidity constraints, CNY depreciation, cost inflation and negative operating leverage.”
In 2014, gaming in Macau  declined 2.6 per cent, marking the first annual decline since records began in 2002 amid a corruption crackdown engineered by Chinese president Xi Jinping.
Macau gaming revenue is driven by VIP rooms, where gamblers can take big bets fuelled by grey market lending. In the past the VIP accounted for about 70 per cent of all reported gaming revenue.
According to research from the Polytechnic Institute of Macau, around half the VIP gamers in 2010 were either government officials or executives at state-owned enterprises. Many are now avoiding Macau, causing the monthly gaming figures to see huge declines.
In January, when the Daiwa team led by Jamie Soo forecast a 21 per cent decline in gaming revenues this year, it was the most bearish bet on the street. But reality has been even worse: in February during the important Chinese New Year period, gaming revenues fell by nearly half. Since then every month has seen a year-on-year decline in excess of 34 per cent (see chart).
Casinos have responded by lowering minimum bets and with attempts to reshape the business model towards the masses. Macau itself is undergoing a big transition from being a gambling haven to more of a family-friendly entertainment zone.
Mr Soo notes the consensus remains optimistic of a V-shaped recovery in revenue, in part based on the “build it and they will come” model from the six major casino operators. “We foresee continued weakness and do not subscribe to the supply-side-driven growth mantra,” he writes.
He said there is “no recovery in sight” for mass revenue trends, as gamblers struggle to get liquidity. In April 2014 Beijing cracked down on UnionPay credit cards that allowed mainland Chinese to circumvent capital controls and make bigger bets.
“Five straight quarters of tables and resources being reallocated to the mass segment has not stopped the GGR haemorrhage. We see no fundamental basis to support a turnaround at this point.”
The newest headache is last week’s devaluation of the renminbi, which has made Macau more expensive and could inflate the cost of outstanding debts. Daiwa expects the renminbi to decline 7.3 per cent against the US dollar in 2015 and another 4 per cent in 2016. Mr Soo writes:
“Over the past few years, we believe Macau’s GGR benefited from the strength in the CNY, which has appreciated by ~10% against the HKD since the end of 2008. The revenue for the Macau Gaming Sector as a whole grew by over 90% over the same period.”
As such, it is only logical that a depreciating CNY will have a negative impact on the sector GGR. In a scenario of sustained CNY weakness, we believe that the mass market to be impacted by a direct reduction in the size of customers’ gaming wallets and impaired liquidity channels. Patrick McGee, Hong Kong, MDT/FT Exclusive