Gaming industry braces for revenue plunge

The Macau gaming industry is expected to lose one-fifth of its revenues during 2015 with casino receipts declining around 21.4 per cent, according to the latest revised prediction by Deutsche Bank. Revenues for 2015 are now expected to shrink to around US$34.6 billion, a level that is close to the year of 2011, when casino revenues hit US$33.2 billion.
Previously, Deutsche Bank had predicted revenues would decline 8.4 per cent year-on-year in 2015. Now they are expecting a cloudier sky for Macau’s gaming industry. However, despite what the bank considers a disappointing February for the gaming operators (official data is expected to be revealed today), this decision is based on the data related to the months of November and December, which have shown a ‘new norm of baseline revenue in the market’.
‘We believe the ambiguity stemming from the Chinese New Year calendar shift, coupled with the run in stocks over the last several weeks, has clouded what truly has been a continuation of well below trend results,’ the report stresses in explaining the revision of the prediction.
With revenues dropping to 2011 levels, Deutsche Bank sees deeper problems related to the demand in the VIP and premium mass segments, which will affect the revenue of the new resorts on Cotai.
‘Quite simply, in our view VIP and premium mass are demand issues and we don’t believe expanding capacity will have a meaningful impact on altering the cadence of either segment. Thus, we believe the benefit of new supply is most likely felt on the grind mass side, which we believe to be at most 20-25 per cent of the market revenues at present,’ the bank’s analysts wrote in their latest note to clients.
In relation to VIP revenues, 2015 is expected to be the worst year since 2011, with the segment expected to drop 23.4 per cent year-on-year from US$26.6 billion in 2014 to US$20.4 billion. If the prediction of the German bank is correct, then revenue from the highest segment of the market will hit values below the performance of 2011, when it accounted for US$24.5 billion.
Following the same trend, the revenue for the mass market will also drop from 2014 to 2015. Deutsche Bank expects a drop of 18.3 per cent from US$17.4 billion in the previous year to US$14.2 billion this year. And this fact will impact the profit of the companies.
‘Our company forecasts have been reduced. On average, our 1Q15 and 2015 Macau property level EBIDTA [Earnings Before Interest, Taxes, Depreciation and Amortization] forecasts are down around 10-11 per cent,’ the note reads.

Limited recovery for 2016

As premium mass market and VIP segment are facing troubles related to demand, the German bank expects the new projects in Cotai to have limited benefit as they increase supply.
‘The Macau market has experienced new hotel room supply in 6 of the past 7 years, to varying degrees. Despite the new hotel capacity, gaming win per hotel room per day has grown in just 4 of the past 7 years,’ it was explained.
On the other side, the mass market is expected to benefit largely from the increase in supply. However, the benefits are also expected to be tricky, as they will bring extra competition for operators, which ultimately will reduce profitability.
That notwithstanding, Deutsch e bank analysts’ expectations are that 2016 and 2017 will be years of recovery for the gaming industry, which will be mainly driven by the mass market.
In 2016, the mass market will generate revenues of US$15.8 billion (up 12 per cent year-on-year from 2015). Finally, in 2017, revenues will be higher than in 2014 accounting for US$17.9 billion (up 12 per cent from 2016), while in 2014 it was US$17.4 billion
In 2016 and 2017, VIP gaming will increase 2 per cent, respectively, to US$20.8 billion and US$21.2 billion. However, and despite this increase, revenues from the VIP segment will still be around US$3 billion away from the numbers of 2011 (US$24.5 billion).
Signs of the limited recovery are proven by the total prediction of revenues hitting US$39 billion in 2017, which is only slightly above 2012’s when they were US$38 billion.