Busted Flush

Sure-footed, agile and with the uncanny ability to cling to almost vertical rock, the goat is surely a master of survival. But the city’s gaming industry has not started the Year of the Goat on the right foot. February recorded the biggest fall ever here for casino takings. Consequently, analysts are all eyes on March and April to see what the second half prospects are for an industry left reeling. Gross gaming revenues plunged 48.6 per cent to MOP19.5 billion (US$2.4 billion) – the biggest year-on-year decline posted by local casinos on record. “This would seem to be at the high end of the most recent consensus of expectations and represented a volatile month that stepped outside of historical trends, which is a likely theme for 2015. The month represented the last – and largest – of the challenging year-on-year comps (+40% in February 2014),” Grant Govertsen from Union Gaming Research Macau said in a note to investors. These results, he posited, will not provide many answers with regard to what happened in February. Although he believes that as March progresses there will be greater insight into the composition of February’s gross gaming revenue – mass market versus VIP – and whether or not February results really do represent a ‘new normal’ or if March/April will return to a gross gaming revenue story that’s more like November-January (MOP23-24 billion). He adds that the research house is not overly convinced about the first hypothesis. Within expectations Macau’s Chief Executive, Fernando Chui Sai On, said that such a drop was expected, claiming he will adjust the monthly target for gaming revenues to MOP20 billion in the coming Policy Address, based on the latest gross gaming revenue that the city posted last month. He indicated that the plunging gaming revenues will not affect the current expenditure of the government. Secretary for Economy and Finance, Lionel Leong Vai Tac, claimed that the recent record-breaking drop in gaming revenues was within expectations. He said that it is not realistic to think that revenues will soar back in April. In addition, Mr Leong claimed that it is understandable that the city’s gross gaming revenues posted such a mammoth drop in gaming revenues as February 2013’s amounted to MOP30.8 billion, a record high. He added that the MOP43.3 billion that the city generated from the gaming industry during the first two months of the year was the median of the revenues in the same period of 2012 and 2011, despite representing a decrease of 35.1 per cent compared to the first two months of 2013. In 2012, the city received MOP49.2 billion in the two months while some MOP38.4 billion was posted in January and February 2011. “Although the fiscal surplus of dozens of billions may not be posted this year, [it] will still meet the budgeted amount. It is only that we had a great amount of money left [over] in the past, and this year we won’t have as much as we had,” the Chinese-language newspaper Ou Mun quoted Mr. Leong as saying. Good news According to Mr. Govertsen, the good news is that based on the full-month gross gaming revenue story, daily casino takings picked up significantly in the final days of February, which also represented part of the traditional ‘boom’ period shadowing Chinese New Year. “We estimate that daily gross gaming revenue was approximately MOP1.1 billion, or more than two times the daily run-rate leading up to Chinese New Year. To us, this suggests that typical seasonality patterns are still in play, though less dramatic relative to prior years. We were also encouraged by the headcounts on casino floors over the period,” he wrote. The analyst believes that mass gross gaming revenue held up fairly well over the holiday period, with revenues likely declining only in the mid/high single digits. In addition, he notes that February’s revenue story was only 8 per cent below the most recent ‘baseline’ of MOP23-24 billion after adjusting for 28 days in February versus 31 days in each of December and January. Gaming revenues have now been declining for nine consecutive months since June 2014. February’s decline of 48.6 per cent remains within the range expected by most analysts, who were predicting a decline of anywhere between 45 and 55 per cent. The drop in gaming revenues is primarily driven by the VIP segment, he says: “The last time we saw a gross gaming revenue number of this magnitude was in early 2011. There were numerous contributing factors, although we believe the biggest culprit for the weak month was the already-troubled VIP segment.” The crackdown on corruption initiated by President Xi Jinping and visa restrictions on Mainland visitors wanting to come to Macau have played a major role in declining gaming revenues. He says that it is possible that VIP players “made a conscious decision to stay away from Macau given the potential for increased scrutiny by the People’s Republic of China during the holiday period”. At the same time “it is also possible that an incremental segment of VIP customers has decided to lay low in advance of the two big annual legislative sessions – the Chinese People’s Political Consultative Conference (CPPCC) begins on March 3 and the National People’s Congress begins on March 5 – where corruption will be a major talking point.” Govertsen also recalls that the highest-level official to date to fall foul of Xi Jinping’s dragnet, Ling Jihua, has just been expelled from the CPPCC. This, too, could be weighing on VIP sentiment, he adds. Still positive According to data released yesterday by the Gaming Inspection and Co-ordination Bureau, during the first two months of 2015 gaming revenues accounted for MOP43.3 billion, representing a decrease of 35.1 per cent in comparison to the same period in the previous year when revenues were MOP66.7 billion. Even so, Union Gaming’s outlook for the second half of 2015 remains positive: the house believes that the industry will recover. “We remain committed to our positive outlook on the group, despite the challenging Chinese New Year, although we expect continued volatility over the coming months”, he says. He adds that March and April will be important guideposts to whether or not the trends seen in February were influenced by various one-time factors or were signs of a new baseline. “Regardless, we continue to have a much higher degree of confidence in mass market trends, which, at least over the Chinese New Year holiday period, seemed to hold up well against a very difficult comp.” David Bain of Sterne Agee forecasts that March gross gaming revenue growth will deliver between -36 per cent and -41 per cent. He says that March growth should be “less bad” than February, and April less bad than March. “March gross gaming revenue is the second most challenging year-on-year comparison for 2015. Last year, March gross gaming revenue was +13.1 per cent, mass gaming was +40.1 per cent, and VIP was +3.1 percent,” he says. He adds that investors have been expecting the Macau market and company specific consensus to be lowered following the first few weeks of February’s channel-checked results. Sterne Agee continues to anticipate positive growth in the third quarter of 2015 followed by significant growth in the fourth quarter. Mr. Bain believes that in the first quarter of this year the Macau company specific consensus will drop 5 per cent to 10 per cent.