20150721-法国巴黎银行-Inflection_point_or_seasonality__60页_2mb

Macau Gaming Sector: Inflection Point or Seasonality?

Core Content Overview

This report analyzes whether the Macau gaming sector is experiencing an inflection point (a turning point indicating sustained growth) or merely a seasonal uptick (a temporary increase due to seasonal demand). The focus is on evaluating the impact of recent policy changes, market trends, and financial performance on the sector's fundamentals and future outlook.

Main Points and Key Information

1. Policy Changes and Their Impact

• Transit Visa Loosening: The Macau government extended transit visas for Chinese travelers, allowing two visits every 60 days (previously 30 days). This is a positive signal but is seen as a supply-side adjustment.
• Smoking Ban: A full smoking ban is expected to be implemented as early as January 2016, which may negatively affect the VIP segment and reduce mass gaming revenue due to the need for players to leave gaming areas for smoke breaks.
• Individual Visitor Scheme (IVS): There are plans to expand IVS to more Chinese cities, which could boost mass gaming demand in the long run.

2. Seasonality and ADR Trends

• Macau's high season is July and August, with ADR typically rising 7% in July and 12% in August compared to June levels.
• To indicate a true growth mode, ADR in July and August 2015 must exceed MOP620m and MOP650m respectively.
• The report highlights that short-term ADR growth may not be sufficient to signal a long-term recovery unless it exceeds normal seasonality trends.

3. EBITDA Margins and Earnings Outlook

• The Macau gaming sector is expected to see EBITDA declines in Q2 2015:
  • Year-over-year (y-y): ~43%
  • Quarter-over-quarter (q-q): ~16%
• EBITDA margins are expected to contract further due to:
  • Lower hotel room prices
  • Reduced minimum bet sizes
  • Additional operating costs from new property openings
• All operators are expected to report declines in EBITDA, with Sands China likely to outperform others.

4. Investment Thesis and Recommendations

• The report remains cautious about the sector's fundamentals, believing that a full recovery will require more than just policy changes.
• BNPP recommends:
  • Galaxy Entertainment: Buy, with a target price of HKD39.90 (+15.2%)
  • MGM China: Hold, with a target price of HKD14.80 (-8.4%)
  • Melco International, Sands China, SJM Holdings, Wynn Macau, and Melco Crown: Reduce, with target prices below current levels.

5. Catalysts and Risks

• Downside Catalysts:
  • Weaker-than-expected weekly ADR during the summer months
  • Higher-than-expected EBITDA/margin declines during the results season
• Upside Risks for Sands, SJM, and Wynn:
  • Earlier-than-expected new property openings
  • Larger-than-expected table allocations
  • Faster-than-expected recovery in gaming demand
  • Increase in demand and liquidity from the Shanghai-Hong Kong Southbound Connect
• Downside Risks for Galaxy, MGM, and MPEL:
  • Regulatory risks (e.g., earlier smoking ban, concession non-renewal)
  • Further macroeconomic deterioration or anti-graft measures in Mainland China

6. Comparison with Vegas

• In Las Vegas, gaming revenue contributes ~30-42% of total revenue, while in Macau it is ~93%.
• Despite this difference, both regions show EBITDA margins sensitive to gaming revenue changes.
• Vegas gaming operators have seen declining EBITDA margins as gaming revenue contribution has decreased, suggesting similar trends may occur in Macau as operators expand into non-gaming segments.

Summary of 2Q15 EBITDA Forecasts

EBITDA Margins and Growth Outlook

Conclusion

The report suggests that while recent policy changes may offer short-term optimism, the Macau gaming sector is unlikely to experience a true inflection point in the near term. Instead, the market may be experiencing a seasonal uptick. The EBITDA margins are expected to decline further due to operating deleverage, non-gaming expansion, and external factors such as the smoking ban and anti-graft campaigns. Investors should monitor ADR performance in July and August 2015 to determine if the market is truly in a growth phase or merely recovering from seasonal demand.