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China – Macau’s Chief executive predicts growth in 2017

By - 29 July 2016

Despite 25 consecutive months of decline, Macau’s Chief Executive fully expects the economy to return to growth in 2017 due to new openings by Las Vegas Sands and Wynn Resorts although analysts aren’t quite so show of a rebound.

Chief Executive Fernando Chui said: “Macau’s gaming industry and the whole economy will continue to adjust, but the decline may shrink to 7.2 per cent this year and even resume growth in 2017. It’s a good time for Macau to re-position after a 25-month gaming revenue drop.”

He added he was working with Macau’s six casino operators to ‘improve synergies’ with the aim of increasing non-gaming revenue to nine per cent by 2020 from 6.6 per cent in 2014.

The optimism has come on the back of Sands China reporting an increase in mass-market gaming revenue in June for the first time in two years and Wynn Resorts recording a 3.6 per cent improvement in Macau taking its GGR for the second quarter to $639.3m from 2015. Both operators have new openings on the horizon with the $4.1bn Wynn Palace and Sands’ $2.7bn Parisian casino on schedule to open in the next two months.

Union Gaming analyst Grant Govertsen believes that recreational gambling will grow in the low double-digit but that increases in VIP gambling revenue will stay modest.

He added that GGR growth will ‘finally turn positive by September,’ driven by the new openings.

UBS analysts highlighted the improvements in mass gaming as a key driver.“We believe the upcoming projects are set to open in an overall stabilising demand environment, as operators continue to focus on gross margins driven by continued mix shift to mass and disciplined cost environment,” they said. “We believe the mass segment in Macau is showing improvement with YOY declines lessening, albeit at a slower rate than our previous estimates. For the market overall, we now forecast Macau gross gaming revenue growth to turn positive in Q4, up around up two per cent, driven by a up 13 per cent year-on-year increase in mass / slot and partially offset by an -11 percent decline in VIP,” it added.

Morgan Stanley’s Praveen Choudhary believes that the short-term improvements ‘are unsustainable, as fundamentals have not improved.’ He pointed to a the fact that the market was getting even more competitive and that the supply-driven demand theory did not work in 2015, believing that EBITDA may drop.

Delta Asia Financial’s Victor Au also believes it is too soon to herald a ‘turnaround’ as one-month’s growth cannot be interpreted as a ‘fundamental improvement in business.’

“The one-month growth in Sands China’s mass-market revenue was taken by investors as an excuse to speculate on the stricken casino players,” he said. “It is highly possible, however, speculators will ride on the openings of new casino resorts to drive the shares higher again So far, VIP business is showing no signs of recovery and I don’t expect the Chinese government to relax its restrictions on Macau gaming industry to boost those VIP taking.

“Speculation can easily and successfully lift casino stocks, especially when the Hong Kong stock market is now on a rising trend,” he added. “We should wait another two to three months to see whether the Macau gaming industry is fundamentally improving or not. The performance of casino operators during China’s golden week holiday in October is critical to measure any improving fundamentals,” he added.

Moody’s predicts a continued fall from the 13.7 per cent annual average GDP growth rate recorded between 2011 and 2015.

“We expect that growth will continue to contract over our rating horizon of the next two to three years, although the pace of decline should slow. “The economic shock to the gaming sector stemming from a decline in tourist arrivals from mainland China has resulted in a sharp drop in the SAR’s headline GDP. Our forecasts of a slowdown in China could weigh on tourist inflows and spending in the near term. This situation, coupled with a maturing gaming industry and the ongoing anti-graft campaign will leave gaming revenues under pressure.”

“Macau’s fiscal reserve buffer is ample, despite surpluses having dwindled considerably over the last two years,” it added. “The absence of public debt allowed the SAR to accumulate total reserves amounting to MOP345.1bn (US$43.2bn) or 94 per cent of GDP at end-2015. Our expectation of a decrease in gaming revenues in 2016 and 2017 suggests that Macau’s economic, fiscal and external metrics will likely weaken considerably from prior robust trends.”

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