fter a booming 2013, the first half performance was already losing the year-on-year comparisons battle. Then came China’s economic deceleration, casino shares market volatility – stocks have lost 20 percent since January with deep ups and downs in some sessions - and a package of negative news headlines ranging from UnionPay scandals, junket arrests and visa restrictions to smoking bans in gaming halls.
May revenue growth, at almost half of market consensus (9.3 percent versus 14 percent), was the tide turner in a year turning out to be choppy.
A Wells Fargo research team was one of the first to reduce expectations for 2014. In a note to clients, the US bank said it revised down Macau’s casino revenues growth for this year to 11 percent compared to the previous figure of 13 percent. This results from the sharp deceleration of the VIP segment, despite a better than expected mass market performance for the second half.
For the second half, Wells Fargo is now awaiting a decrease in VIP revenues of 1.5 percent compared to the previous 3 percent rise. On the other hand, the mass-market segment should see revenues climb 30 percent above the previous estimations of a 25 percent jump. ‘That said, we do not see downside risk for 2014 estimations given the mix shift to higher margin mass business,’ wrote Wells Fargo. ‘We remain positive on Macau but continue to believe 2014 is likely to be choppy.’
In a separate report, Telsey also underlined that the mass market will continue to compensate for the fall in VIP revenues. ‘There’s no sign that the mass market engine is slowing,’ said the brokerage, citing a 36 percent hike in May, up from a 34 percent rise in April.
Investors are also assuming that June will now be another soft month, even more so than May. ‘Unlike the previous four quarters, we do not expect any significant earning beats in Q2, assuming June growth of 6.5 percent,’ says Well Fargo. Last week, Credit Suisse released a report pointing out that gaming revenues in Macau could, in a worst-case scenario, stagnate this month with a marginal increase of 1 percent, due to the World Cup kick-off on Saturday.
As gamblers are distracted from casinos to watch and bet on tournament matches, revenues from operators could hike a maximum of 6 percent, Credit Suisse wrote. Bank of America predicts a June increase of 8 percent. The VIP segment will again be a decisive factor in any slowdown, as its revenues are set to decrease 4.5 percent, while mass gains will be up 32 percent, posits Wells Fargo.
Sands’ smooth sailing
Following a weak second quarter, investors are betting Las Vegas Sands is the operator who’s likely to benefit most as the market continues to shift from VIP to mass, given its larger exposure to the latter segment in Macau. In the first quarter, the parent company based in Macau, China Sands, was the best performer of the Big Six here: profits skyrocketed 50 percent year-on-year supported by a mass market revenue growth of 55 percent.
Despite a weaker than expected second quarter and a ‘choppy’ 2014, Macau’s success story is still solid. ‘We remain bullish on the medium to long term story as Macau is still significantly underpenetrated and see Macau reaching US$115 billion dollars of revenues in 2018,’ says Wells Fargo.