Morgan Stanley analysts dispel claims Macau is at a bottom

Morgan Stanley analysts say Macau is not at a bottom despite three bullish claims by optimists that regulatory easing would follow a fiscal deficit; casinos would be profitable as non-gaming outfits, and that casinos are trading close to their replacement cost.

For regulatory easing, the analysts agreed that a fiscal deficit is possible in 2015, but the Macau government still has fiscal reserves of MOP350 billion ($43.8 billion) as of the end of May and the unemployment rate is 1.7 percent. 

Macau Financial Secretary Lionel Leong said that if monthly GGR fell below MOP16 billion it would force the government to start implementing cost-cutting measures. 

“A monthly run-rate of MOP16bn would mean a budget deficit of MOP9bn for the remaining seven months of the year, based on current budgeted expenditure.” 

“However, we have noticed that actual government spending was normally ~80% of budget in 2013-14. On top of this, the government could delay infrastructure projects and reduce payroll.”

The analysts added that some investors believe that the Macau government may ease off on smoking and other restrictions if it runs a fiscal deficit. 

“We disagree. Though the remaining months of 2015 could easily show a deficit at a monthly GGR run rate of MOP16bn, it is not enough.”

The second claim the analysts picked apart was the idea that Macau’s hotel companies can generate reasonable returns without gaming.

The Morgan Stanley analysts say the hotel and retail business is only 20 percent of current EBITDA, assuming no complimentary rebates to players and junkets.

The hotel and retail revenue is not enough to compensate for existing operating expenses, they said.

“Without gaming, hotel RevPAR and retail revenue would suffer meaningfully.”

For the idea that casinos are probably trading close to replacement cost, the analysts said the group still trades at 2.3 times of invested capital including Cotai capex and at 60 times EBITDA of pure hotel and retail businesses. 

“Thus, valuation has not bottomed in terms of replacement cost.”