Morgan Stanley says investors are too focused on weekly data for signs of bottoming revenue, while the risk of significant margin dilution due to higher fixed costs and oversupply is underappreciated.
By the end of 2018, the analysts expect table growth of roughly 20 percent – based on 200 tables for each new casino – and casino hotel rooms growth of 50 percent.
“Fixed costs associated with tables and hotel rooms are likely to grow by a similar magnitude, notwithstanding more diversified non-gaming amenities in the new casinos.”
Similarly, the analysts say that in 2014, staff costs represented about 60 percent of total fixed operating expenses (excluding SJM and MPEL). They expect staff costs to grow by 15 percent, 18 percent and 31 percent in 2015, 2016 and 2017, respectively, driven by 5 percent wage CAGR and 7,000 new staff per new casino.
The analysts retain their cautious industry view and along with reduced GGR expectations, have lowered their estimates for EBITDA by 12 to 19 percent.
The note adds that June VIP roll and mass revenue declined 17 percent and 15 percent month-on-month, weaker than normal seasonality of negative 12 percent and negative 8 percent MoM, respectively, despite the opening of Galaxy Macau Phase 2 on May 27.
“We have not seen signs of GGR stabilization since hotel room rates are still falling (-7.5% YoY in May), junkets and VIP rooms are getting wound down. We don’t think premium mass and VIP have found bottom yet. In addition, the potential smoking ban is set to reduce GGR further in 2016.”