Macau gaming revenue forecast cut to 4% on VIP weakness

Continued weakness in the VIP segment has contributed to a reduction in the full year 2014 Macau gaming revenue forecast to 4%, according to Fitch Ratings. We are revising the forecast down from 10%, which was already reduced in mid-July from our initial forecast of 12%, but we note that long-term fundamentals remain strong.

Our new forecast incorporates the balance of the year's growth for mass, VIP and slots of +15%, -15% and +5%, respectively. This equates to 3.5% monthly declines for the remainder of the year, which is consistent with the past two reported months. YTD revenue is up 8%. Our assumptions take into account the smoking ban on the mass floors going into effect next month, lack of new supply, and tough 2013 comparisons for the balance of the year (mass and VIP were up 44% and 18%, respectively, in Q4 last year).

The VIP segment has been pressured recently by tightening of junket credit and the corruption crackdown on the mainland. We think these pressures are temporary and expect VIP to turn back positive in early 2015 as YoY comps get easier and as the mentioned pressures subside, although the exact timing is hard to handicap. Weak temporary VIP trends also occurred in 2012, during the transition of power to Xi Jinping from Hu Jintao.

Fitch remains positive on the mass market side and expects monthly YoY revenue increases in the 10%-20% range in this segment through first-half 2015 until Melco Crown and Galaxy complete their Cotai projects midyear. At that point we expect acceleration in mass growth, which will largely depend on the number of table games these projects are allocated and on their ability to hire and train adequate number of dealers.