Inside Asian Gaming

19 Market Outlook Karen Tang, an analyst at Deutsche Bank, issued an overview report just before Christmas on the Macau market and its prospects for 2009. The report, though written without the benefit of the latest PMI data, pointed out that during an earlier downturn in 1998, Macau’s gaming revenue declined 18% and then a further 10% in 1999, dragged initially by a contraction in VIP rolling and by a fall in mass revenue. Soft landing? “This time around, the decline might be slightly less, as in recent years new resorts have put Macau on a spectacular growth path,” says Ms Tang. However, she had a caveat. “…with travel restrictions likely to remain for the next six months, we expect gaming revenue to fall 14% in 2009, in line with comments made by Macau’s Chief Executive in early November. For 2010, we expect industry growth to fall a further 6%,” she adds. In December, Jun Ma, Chief Economist for Greater China at Deutsche Bank, lowered his China GDP forecasts for 2009 and 2010. He did it because of a sharper slowdown in China’s exports than economic analysts had generally predicted. He suggested GDP increases of 7% and 6.6% respectively over the next two years, from the 7.6% and 7% tipped previously. The latest economic picture painted by CLSA and the CLFP is even bleaker than the bank’s assessment. Because of Macau’s dependence on VIP gaming, the loss of a small number of players or a reduction in their rolling is likely to have a disproportionate impact on the local market compared to mass play. “Our recent conversations with junket operators suggest that the market is still underestimating the downside for Macau,” says Karen Tang of Deutsche Bank. “First, junket operators are cutting their lending to VIPs as their customers’ net worth is falling. Second, and more importantly, the amount of VIP rolling which can be generated for the same amount of lending is now 30% lower than a year ago, and can get much worse. We expect Macau’s gaming revenue to fall at least 14% next year, dragged by a 25% fall in VIP revenue,” she explains. Rolling—but not everywhere “A year ago, for every HK$100 million of working capital, junket operators could typically generate HK$400 million to HK$600 million in VIP rolling per month. Now, many can generate only HK$300-400 million,” she adds. “Hence, the multiplier on VIP rolling is down 30%. The reason is thatVIPs are delaying repayments. Longer credit cycles tie upworking capital, and slow the process through which junket operators can lend to the next customer,” she asserts. Celeste Mellet Brown and Thomas Allen, analysts at Morgan Stanley, make broadly similar points in their overview of the Macau and Las Vegas markets, published just before Christmas. “Macauwas able to thrive in 2008 because of junket consolidators and operators offering large amounts of credit to both players and junkets,” they state. “While the impact of less credit from junket consolidators is at least partially understood by the market, we believe reduced credit from some operators is not. We believe the reduced credit will have a more significant negative impact on VIP gaming revenue and now model Macau VIP gaming revenue down 17% in 2009. While we expect mass-market revenue to increase in 2009, we have lowered our estimate to 10% year-on-year growth (from 20%).” Morgan Stanley says its conservative estimate reflects the impact of an economic slowdown in China and the rest of the world; lower spending per Mainland visitor as more come on whistle-stop package tours rather than using Individual Visit Scheme visas, and lower growth in the second half of 2009 as City of Dreams will now be the only new venue to open this year, following the suspension of Las Macau gaming revenue yoy growth (1995-2010F) Source: Deutsche Bank, Macau government Macau gaming revenue growth by segment (1995-2010F) Source: Deutsche Bank, Macau government Macau VIP Gaming Revenue Source: Morgan Stanley Research