Share price of leading casino operators like Wynn Resorts Ltd. WYNN, MGM Resorts International MGM, Melco Crown Entertainment Ltd. MPEL and Las Vegas Sands Corp. LVS have been declining for a long time now, given a sluggish environment in Macau, a key operating region for these companies.
These stocks tumbled once again yesterday as analysts from both Deutsche Bank and Credit Suisse reportedly made bearish comments and provided a weak forecast for the gambling industry. Also, as per media reports, Deutsche Bank downgraded some of the major companies in the industry.
What Did the Analysts Say?
A Credit Suisse analyst believes that the sector is unattractive and expects its fundamentals to remain weak, going forward. Gross gaming revenues are expected to decline in the range of 36% to 43% in Mar 2015. An analyst at Deutsche Bank expects gross gaming revenues to decline 25% year over year in 2015.
Why the Bearish Stance?
Despite the Chinese New Year holidays, gross gaming revenues for the month of Feb 2015 plunged 49%, thereby marking the ninth consecutive decline and the fifth consecutive double-digit decline. As per Deutsche Bank, China’s upper middle class went to Europe, Japan and Korea to gamble during the Chinese New Year due to their cheaper currencies.
Meanwhile, gross gaming revenues for the first 8 days of March reportedly declined 8% than this year’s average daily run-rate. In fact, owing to this a number of analysts expect revenues to fall somewhere in the range of 37% to 46% for the month of Mar 2015.
Notably, owing to the anti-corruption drive, Macau’s visitation arrivals fell 1.5% year over year for the month of January, which is a negative for the companies operating in the region.Given the scenario, analysts were bound to give a bearish outlook.
Why the Continuous Decline?
Gambling revenues have been falling consistently owing to the nationwide crackdown on corruption in China. Macau officials have imposed restrictions on high rollers to stop billions of dollars from being siphoned off illegally from mainland China to Macau. Consequently, this has lowered footfall at the local casinos. Meanwhile, a cooling Chinese economy, political unrest and a smoking ban on mass market gaming floors have compounded woes.
Misfortunes of Macau
A couple of analysts believe that the main problem in Macau is not the insufficient supply of gambling facilities. Instead, the lack of demand from VIP and rich gamblers is the core problem.
We believe that the worst is not over yet with China reportedly expected to launch another major crackdown to restrict illegal money transfers. The crackdown comes at a time when the casino operators are already feeling the heat of China’s anti-corruption campaign. This is expected to further reduce footfall and hit Macau casino revenues. (Read: Macau Anti-Corruption Drive to Intensify, Casino Stocks Dip)
On the other hand, the Macau government is expected to submit a bill to ban smoking in the VIP rooms after implementing the same for mass gaming floors in Oct 2014. This would compound woes as the smoking ban, if implemented, would further hurt revenues.
There are a few resort openings in the pipeline by operators such as Wynn Resorts, MGM Resorts and Las Vegas Sands in the near-term. Per Deutsche Bank, if the situation in Macau does not improve despite these upcoming casino resorts, gross gaming revenues may not even recover in 2016,.We need to wait and see what leads to a turnaround in the region and the extent to which the concerned companies benefit from it.
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