Deutsche Bank's Macau Visit: 5 Positives And 5 Negatives

Deutsche Bank analysts recently took a trip to the top gambling hub in the world, Macau, China, to get a first-hand look at the struggling gaming industry. This week, analyst Carlo Santarelli released a report with a list of five positive and five negative takeaways from the firm’s Macau visit.

Negatives

Even though gaming revenues and share prices of the major Macau casino operators have fallen dramatically in the past year, Deutsche Banks doesn’t believe that Macau is out of the woods just yet. Santarelli mentions five remaining negatives:

1. VIP liquidity continues to suffer as credit in Macau’s junket system remains tight.

2. A smoking ban is a near certainty, but 2016 consensus gross gaming revenue (GGR) estimates have not factored in the potential ban.

3. Promotional spending for the operators is on the rise and will likely be boosted further by the opening of Macau Studio City later in 2015.

4. Operators will face margin pressures from retail operations, as over 1 million square feet of new retail space is expected to come onto the market in Cotai in coming years.

5. Fixed cost escalations from new projects will continue to weigh on earnings.

Positives

Despite the major headwinds, Santarelli also mentioned five things to like about Macau:

1. Operators indicate that former VIP gamblers are now playing mass areas, a modest net positive for margins.

2. The smoking ban would likely lead operators to shift VIP tables to mass gaming, which would boost mass revenue by about 20 percent.

3. Mass revenue trends have been relatively stable in recent months, and Deutsche Bank sees the potential for an inflection back to positive mass revenue growth in December.

4. Concerns over the mid-term review are overblown and Santarelli sees it as “little more than a fact-finding examoination.”

5. Deutsche Bank is expecting up to a 20 percent reduction in labor expenses at legacy resorts once the major operators open their respective Cotai facilities.

Outlook

Deutsche Bank has a mixed outlook for the four U.S.-listed Macau operators. The firm currently has a Buy rating on MGM Resorts International MGM and Wynn Resorts, Limited WYNN.

Deutsche Bank also has a Hold rating on Las Vegas Sands Corp. LVS and a Sell rating on Melco Crown Entertainment Ltd MPEL.

Disclosure: the author owns shares of Melco Crown Entertainment.