Macau VIP volatility the “new normal,” mass strength to continue

    Volatility in Macau’s VIP gambling sector is likely to be the “new normal,” while the mass market sector will continue to grow, Sterne Agee said in a note, adding that headline figures on gross gambling revenue are likely to be uneven for the foreseeable future.
    GGR in June fell year-on-year for the first time in five years, declining 3.7 percent amid a steep drop in VIP revenue. Bank of America said this week it sees that trend continuing with an expected drop in revenue of 11 percent in July.
    “VIP volatility is not new, and we believe the “new normal” VIP trend is more or less absorbed by investors at this point,” Sterne Agee analyst David Bain wrote. “Our key focus remains Macau’s long-term mass secular story, which continues to strengthen.”
    JP Morgan also shares Sterne Agee’s bullish view and recommended investors begin buying into volatility. It cites the positive relationship between supply and demand, supported by infrastructure improvements as part of the reason for its longer-term optimism on the sector.
    Sterne Agee said Melco Crown remains its top pick, but is cutting its forecasts for second quarter EBITDA to $299.4 million from $349.1 million. It reduced its outlook for 2014 EPS to $1.64 from $1.77, for 2015 to $1.90 from $2.18 and for 2016 to $2.55 from $3.05.
    The firm said the second quarter was negatively affected by $25 – $30 million of hold factors, whereas the longer-term forecast was reduced because of an expected acceleration in its amortization and depreciation schedule.
    In a separate note, the firm also cut its second-quarter estimates for Wynn Resorts, citing the reduced VIP revenue, construction work at Wynn Macau, which began in April and higher labour costs.
    Wynn implemented a 5 percent pay increase from March 1, and a one-month pay bonus to its 7,600 work-force. The firm noted that the pay increases were a pro-active approach to retain staff in an ever tightening labour market in Macau, especially in light of planned new openings beginning next year.
    It said the remodelling of two VIP junket rooms reduced table count in the quarter. The work is likely to be completed by next Chinese New Year.
    The second-quarter EBITDA estimate was reduced to $422.5 million from $451.2 million, below consensus for $441 million. The 2014 EPS estimate drops to $8.87 from $9.18 and for 2015 to $10.06 from $10.47.
    JP Morgan said its top four picks are Las Vegas Sands, on which it raised its price target to $91.00 from $89.00. It also likes Melco Crown, Wynn Resorts and MGM Resorts.