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China – Deutsche Bank changes Macau’s VIP growth to decline

By - 23 September 2014

Deutsche Bank has downgraded its 2014 and 2015 forecasts for Macau’s GGR, setting lower price targets than it originally anticipated.

Deutsche Bank analyst Karen Tang shaved nine per cent off her 2015 gross gaming revenue forecast from 10 per cent down to just one per cent growth. She predicts that the VIP forecast should be changed to reflect five per cent decline instead of five per cent growth with mass market growth falling from 18 per cent to 11 per cent.

Deutsche Bank’s Karen Tang said: “We now become concerned that, in the current anti-corruption environment, next year’s supply may not be able to stimulate VIP demand. We worry that VIP may fall another five per cent in 2015, despite easier comps in 2H. VIP bet size tends to be related to how fast easy-money is being made, or how fast the “nouveau riche” class has been created. This tends to follow, not the GDP growth rate, but the second derivative of GDP. We also believe that wealth creation in China is changing from “resources & relationship-based” in the last five years (as in the coal mining and property industries) into “innovation & entrepreneurial-based” (as in internet and consumer services) in the next five years. While these newly-minted millionaires may also be gambling VIP style, their average bet sizes will also likely be lower than the previous generations of coal mine owner VIPs.”

There is plenty of activity in terms of building work on the Cotai strip with Galaxy Macau’s next phase and Melco Crown‘s Studio City expected to be completed in mid-2015. MGM‘s MGM Cotai is tipped to be ready in early 2016 whilst Las Vegas Sands‘s Parisian Macau is expected to be operational in late 2015.
Deutsche is concerned though about the impact of larger supply on profitability.

“While the market already expects the two new casinos will drive visitor demand in 2015, the market seems to ignore the negative impact from supply on pricing,” Karen Tang said. “After tripling over the past three years, Macau’s mass table yield finally peaked at US$12.9k/day in 1Q14. In 2Q14, mass table yield declined three per cent quarter on quarter to US$12.3k/day. Over the next two years, given a large increase in mass tables from the new casinos, we expect mass table yield to fall five per cent in 2015, and nine per cent in 2016. This capacity-driven revenue growth will hut margins in our view as the most important operating cost, i.e labour cost, is directly linked to capacity.”

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