THE FUTURE BECOMING THE PRESENT IN MACAU

The calendar shift of Chinese New Year into Feb could be the last of the positive catalysts for now. Feb may disappoint, the variables are in place to pop the VIP bubble, and margins could be pressured.

We have been bullish on Macau and the Macau stocks for some time now.  Unfortunately, the long list of positive catalysts have come and gone (almost).  No one knows what the near and intermediate term will bring but we’re paid to project, estimate and opine.  In our projection, estimation, and opinion, the set up does not look favorable.

The generally known and positive:

  • Q4 was terrific in Macau
  • January was huge
    • table revenue was up 63%
    • both Mass and VIP was strong
    • on average, $54 million in revs per day
  • LVS, WYNN, and MGM should all report strong Q4 EBITDA beginning tonight with LVS and make positive comments about Q1 so far
  • On the surface Feb looks to be a good month with Chinese New Year falling in Feb vs. Jan last year

The issues:

  • The VIP bubble – China has tightened twice, GDP is slowing, and liquidity and credit are not flowing like they have been.  As we showed in our post “MACAU VIP AND CHINA MACRO VARIABLES”, China economic factors explain an overwhelming percentage of changes in the VIP business.  The calendar shift of Chinese New Year may be masking a slowdown in VIP already occurring in February.
  • Initial read on February is disappointing – Our sources indicate that Macau may generate only 10bn MOP ($1.2bn) in table gaming revenues in February, up “only” 35% YoY, but a sequential slowdown from January’s 63% gain despite the Chinese New Year shift.  Moreover, if that number holds, revenue per day will have fallen from $54m to $44m sequentially.
  • Commission cap probably isn’t applicable to revenue share – This is allowing SJM to be very aggressive with junket pricing because most of their arrangements are on revenue share and not on turnover commission.  LVS, WYNN, and MGM’s Macau properties maintain a greater percentage of commission based arrangements which could be bad for market share as we move forward.
  • SJM aggressiveness – We are told that SJM is aggressively pursuing VIP market share at the expense of margins.  A large junket operator is getting 55% of revenue with volume incentives up to 57% to operate inside Grand Lisboa and absorb property expenses.  This is the highest revenue share in the market and indications are that SJM is looking for more of these relationships.  Specifically, they are targeting a number of Venetian junkets to move over to SJM properties.  Previously, SJM had been franchising out at this rate but this is the first time to our knowledge that they are offering this structure in house.

The problem for Macau and the stocks is that the positive catalysts are in the past and present but not the near term future.  These risks are real and imminent and should not be ignored by the investment community.  LVS reports tonight and MGM tomorrow morning but we’re not sure we’ll get a lot of color on these issues just yet.  Stay tuned.