Macau’s mass market showing signs of stabilization, Morgan Stanley says

Macau’s mass market may be showing signs of stabilization, while the VIP and premium mass markets are declining, but may also be nearing the bottom, Morgan Stanley said in a report analyzing the impact of China’s anti-corruption campaign.

The firm said the anti-corruption drive was a long-term necessity, but has had a disproportionate impact on three key areas of the economy, namely gambling, consumption and gifting.

The VIP market in Macau has dropped 65 percent from its peak, while the mass premium market is down by 37 percent. While the graft crackdown was the primary driver of the plunge, a scandal involving a key junket, a liquidity crunch and the smoking ban all took their toll.

“With grind mass potentially growing with more supply, we could see stocks turnaround over the next 12 months,” Morgan Stanley said. “The long-term outlook remains positive with low penetration, improving infrastructure and high FCF potential.”

Morgan Stanley notes that before the crash, Macau’s gaming industry had recorded compound annual growth of 32 percent between 2009 to 2013.

It cited a leading junket firm as saying VIP gamblers used to check in HK$20 to HK$30 million per trip at the peak of the cycle. The high-roller segment grew from US$10 billion in 2009 to US$30 billion in 2013.

“The availability of junket liquidity and the real estate bubble, used as collateral, drove the segment higher. The problem was the end consumers – especially premium mass and VIP players, were losing between US$100,000 and US$250,000 p.a., which is unsustainable,” it said.

VIP revenue was MOP8.2 billion ($1.0 billion) in November 2015, 67 percent below the peak of MOP25.0 billion.  

Morgan Stanley also noted the impact has now spread beyond Macau, with both Las Vegas and Singapore reporting double digit declines in VIP gaming revenue.

Although, it says the mass market is showing signs of stabilization, the main concern now is potential over supply from the new casinos due to come online in Cotai over the next few years.

“VIP revenue is still declining and junket rooms have been shutting down over time. However, mass revenue for the last three months has been tracking with seasonality and appear to be stabilizing. We also believe that mass revenue may be underreported because casinos are using VIP rooms for cash play to allow rich customers to smoke.”