As news of deceleration in gaming revenue for Macau made the headlines over the last two months; Wall Street reacted sharply yesterday to more updates on the front. Shares of Macau’s biggest casino companies declined yesterday. Melco Crown Entertainment Ltd (ADR) (MPEL) was down almost 4.9%, Las Vegas Sands Corp. (LVS) fell 2.1%, while Wynn Resorts, Limited (WYNN) slipped 2.7%.
The drop came after Deutsche Bank Analyst, Carlo Santarelli, revised down his forecast for Macau’s gaming revenue. Santarelli expects third quarter revenue to slip 0.9% year -over-year (YoY) to $11.1 billion, down from his earlier forecast of 3% growth. He also revised down his full year growth forecast to 6%, from his previous prediction of 8.3%.
Santarelli expects revenue from Macau VIP segment to decline by 7% for the second half of the year, as compared to his previous expectation of 3%. The growth from the mass market segment is also expected to slow down to 16%, down from the earlier predicted 23%.
Gaming revenue in Macau has experienced massive growth in recent years. For the past three years, revenue has grown 24% annually to almost $45 billion in 2013. Analysts at CLSA expect annual revenue of $90 billion by 2020. But the robust growth has recently seen a blockade. Gaming revenue declined 3.4% in June this year, the first monthly decline in five years.
The eroding traffic from high rollers to Macau also impacted the quarterly earnings results of companies like Wynn and Las Vegas Sands. Both casino giants missed their revenue estimates for the June quarter on back of a decline in revenue for the VIP segment, but remained confident on their prospects; given their pipeline of casino resort properties on Macau’s reclaimed Cotai Strip.
Macau obtains its major share of revenue from wealthy high rollers that pour into the island state from China. Macau’s dependence on these high spenders is evident from its average gaming revenue per visitor that stands at $1,540 compared to only $170 in Las Vegas.
For the month of July, Macau’s gaming revenue declined again, by 3.6% to $3.56 billion, missing the range of analysts’ estimates of $3.3-3.5 billion. The drop in revenue for July cautioned investors as they expected revenue to jump back up; since the FIFA World Cup was over in the first half of the month.
The alarming decline for July was attributed to the Chinese corruption crackdown targeting wealthy Chinese individuals, who make up 56% of Macau’s high rollers, and tough lending restrictions on junkets.
Wells Fargo Analyst, Cameron McKnight, has also noted that Macau’s gaming revenue did not get any better during the latter half of July, following the conclusion of the World Cup. This might mean that the increasingly strict money flow regulation in China and transit visa changes have caused Chinese VIP gamblers to revert back.
Moreover, as a result of the weakening gaming revenue from Macau, average analysts’ 12-month target price has reduced for Las Vegas Sands from $91 in June to $87.5. Similarly, the average target price for Wynn Resorts has declined 5% to $24.5, while the Street’s view on Melco Crown shares has slipped 11% to $45.