20151203-大和证券-Macau_Gaming_Sector_Fear_and_loathing_in_Macau_35页_3mb

Macau Gaming Sector Summary

Core Content

The Macau gaming sector is currently facing significant challenges, with the overall outlook being negative and the market showing no signs of near-term recovery. The report highlights that the sector's fundamentals are under pressure, and the government's guidance for 2016 is more pessimistic than previously anticipated, further indicating a bleak outlook for the industry.

Main Points

• Sector Outlook: The report maintains a Neutral sector stance with 12-month target prices, but there are clear downside risks for share prices in the near term.
• GGR Trends: The GGR (Gross Gaming Revenue) for both the VIP and mass market segments has been declining, with the mass market experiencing a 6% QoQ drop in 3Q15.
• VIP Segment: Increased supervision and regulation, particularly around junket operations, are expected to exacerbate operational and liquidity pressures. The report forecasts an 8% YoY fall in VIP revenue for 2016.
• Mass Market: The mass market is expected to continue its decline, with 3% YoY dip forecasted for 2016. The reporting of UnionPay transactions and declining visitor numbers are key factors that negatively impact the mass segment.
• Valuation Concerns: The sector is currently overvalued, trading at 16x EV/EBITDA multiple, and even more so under the government's 2016E GGR guidance.
• Catalysts and Risks: There are no visible near-term catalysts that could drive recovery. The report identifies several risks, including currency depreciation, interest rate hikes, and policy overhangs.
• Government Policy: The Macau Government's November 2015 Policy Address suggests a further decline in GGR for 2016, with a 14% YoY drop. The government does not appear to be bottoming its policies, and regulatory actions continue to press on the sector.
• Sector Stress Test: Under different GGR scenarios, the EBITDA is expected to decline significantly, with the worst-case scenario indicating a 36% YoY drop in sector-wide EBITDA.
• Company Ratings and Targets: The report recommends Galaxy and Melco Crown Entertainment as preferred stocks based on Cotai-ready market share shifts, while Sands China is held at Hold.

Key Stock Calls

Key Segment Analysis

Mass Market

• GGR Decline: The mass market has experienced a 6% QoQ drop in 3Q15, and is expected to see a 3% YoY dip in 2016.
• Liquidity Issues: UnionPay disruptions have impacted HKD cash withdrawal services, and combined with declining visitor numbers, this is expected to hurt new player acquisitions.
• Cost Cuts: Operators are likely to continue cost-cutting, especially in marketing, which could add to the decline.
• No Recovery: The report suggests no fundamental basis for a mass market recovery.

VIP Segment

• Regulatory Pressure: Junket disclosure rules and increased supervision are expected to add pressure to the VIP segment.
• Credit Advances: Casinos are cutting credit advances to minimise risk.
• Attrition Risk: There are signs of increased junket attrition, which could further reduce VIP volumes.
• Revenue Forecast: A 8% YoY fall in VIP revenue is expected for 2016.

Macroeconomic Risks

• CNY Depreciation: The depreciation of the CNY is a key risk, as it could reduce HKD gaming wallets for mass players and increase debt repayment costs for VIP players.
• US Rate Hikes: The US Fed's rate hikes could exacerbate liquidity pressures and accelerate capital outflows from China.
• Currency Impact: These currency pressures are not factored into current forecasts, potentially increasing downside risks.

Government Guidance

• 2016E GGR Forecast: The Macau Government forecasts a MOP200bn GGR for 2016, representing a 14% YoY decline.
• Fiscal Surplus: Despite the decline in GGR, the Macau Government is not overly concerned about the fiscal deficit, as it still achieves a surplus.
• Policy Focus: The government is emphasising supervision and regulation, with no signs of supportive policies being introduced.

Valuation Analysis

• EV/EBITDA Multiple: The sector is currently trading at 16x EV/EBITDA, based on Daiwa forecasts, and is considered overvalued.
• Government Guidance Impact: Under the government's GGR guidance, the sector's valuation could be even more expensive, nearing historical peaks.

Conclusion

The report concludes that no near-term catalysts are expected to drive recovery in the Macau gaming sector. The sector's fundamentals are under pressure, and the government's guidance suggests a further decline in GGR and EBITDA. While Cotai-ready operators are still preferred, the overall outlook remains cautious and negative.