Morgan Stanley's Macau Visit 'Did Not Provide Much Optimism'

Morgan Stanley analysts recently made a trip to Macau to take a firsthand look at its struggling gaming industry. According to a new report by analyst Praveen Choudhary, Macau casino operators have little cause for optimism at this point.

Here’s a breakdown of Morgan Stanley’s key takeaways from the visit.

Liquidity Challenge

Under increasing pressure from falling revenues, Macau casinos have started to be much tighter with credit. Less credit means less liquidity for junket operators, and VIP rooms have been closing up shop as a result.

With VIP revenue still accounting for about 50 percent of total gross gaming revenue in Macau, the continued closure of junket rooms could provide strong headwinds for operators in upcoming months.

Related Link: Nomura Cuts Targets On Macau Casino Names Across The Board

Battle Over Lower-End Customers

In an effort to make up for slipping VIP numbers, casino operators have been lowering hotel room prices and table minimums to appeal to lower-end customers. Unfortunately, the spending power of this customer segment is limited, and Morgan Stanley sees room prices continuing to fall as new resorts open in Cotai.

Margin Erosion

Morgan Stanley is predicting annual wage growth of around 5.0 percent in coming years. Increasing wage costs coupled with falling revenues means that margins for the operators could continue to suffer.

Regulatory Uncertainty

The government could also put in place a stricter smoking ban in Macau in 2016. In addition, license renewals and visitor cap discussions remain concerns for resort operators.

Stock Ratings

Despite collapsing share prices over the past year, Morgan Stanley remains cautious on Macau gaming stocks for the time being. The firm has an Underweight rating on Melco Crown Entertainment Ltd (ADR) MPEL and the Chinese unit of Wynn Resorts, Limited WYNN.

Morgan Stanley has an Equal-weight rating on the Chinese units of MGM Resorts International MGM and Las Vegas Sands Corp. LVS.

Disclosure: the author owns shares of Melco Crown Entertainment.