Macau: August's Gross Gaming Revenues Could Disappoint

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Includes: LVS, MGM, MPEL, WYNN
by: Elephant Analytics

Summary

July's results showed some improvement compared to June's results. However, July also benefited from additional weekend days.

Weekend days typically have higher gross gaming revenues and are becoming more important as mass gaming increases in importance.

There are some expectations that August's year-over-year results will be better than July's.

However, August has two fewer weekend days in 2016 than in 2015.

Thus, my initial expectation is for a -7% to -11% year-over-year decline.

Sentiment toward Macau is getting a bit more positive after July's results only showed a modest year-over-year decline. Some believe Macau should start showing positive year-over-year growth soon. However, I believe August will show a steeper decline in year-over-year results even if Macau has actually stabilized. The reason for this is that August has fewer weekend days in 2016 compared to 2015. If the market doesn't pay that much attention to the weekend day factor and doesn't adjust expectations accordingly, there could be a temporary sell-off when August results come in below expectations.

July 2016 Results

Macau's gross gaming revenue was only down by 4.5% in July, beating analysts' expectations for a 5.5% decline. Wells Fargo also mentioned that July's gross gaming revenues were up 11.9% compared to June, significantly higher than the historical 4-5% increase from June to July.

However, I'd note that July 2016 had two more weekend days than June 2016, while July had anywhere between zero to two fewer weekend days than June during the years 2012-2015. After adjusting for the effect of the weekend days, I believe July 2016's month-over-month growth compared to June 2016 is pretty close to previous years.

In 2011, July's gross gaming revenue was 16.4% more than June's, but July also had two more weekend days than June. Macau was growing quickly in 2011 (at least several percent per month), so that had an impact on its growth. Still, we can see from the table below that the number of weekend days appears to have a pretty significant correlation to growth.

A Look At August 2016

August's gross gaming revenues have typically been slightly higher than July's. There doesn't appear to be as much correlation between relative weekend days and August versus July gross gaming revenues, but that's probably due to the higher general growth rate in earlier years. July 2012 was also a relatively weak month (only +1.5% year-over-year growth, which was the lowest growth for any month in 2012), making that comparison easier.

Year

August Vs. July

Weekend Days

2011

2.3%

-2

2012

6.3%

-1

2013

4.2%

1

2014

1.6%

2

2015

0.0%

2

2016

TBD

-2

Click to enlarge

Due to the weekend day effect in 2016, I think August's gross gaming revenues will actually be slightly lower than July's. My initial estimated range for August's gross gaming revenues is 16.6-17.4 billion MOP, which represents a 7-11% decline versus August 2015. There are also two fewer weekend days in August 2016 than in August 2015, so the higher year-over-year decline rate compared to July 2016 (which had two more weekend days than July 2015) makes sense.

This -7% to -11% estimate is significantly lower than some of the other reported estimates, such as +2% for Sanford Bernstein and -3% to -7% for Union Gaming.

As for the effect of other events, the Wynn Palace's opening on August 22 should help August's numbers a bit. However, even if the Wynn Palace results in significant incremental gross gaming revenues, the effect on August's total month numbers will be limited, as it will have been open for less than a third of August and only one weekend. Thus, the Wynn Palace's incremental effect on August's gross gaming revenues is probably less than 1%.

As well, Typhoon Nida has disrupted travel, with flights and ferries from Hong Kong, Shenzhen and Guangzhou among those affected. This will probably have a minimal effect on August's gross gaming revenues, though, since it affected weekday travel and only for a short amount of time.

Conclusion

Due to the effect of two additional weekend days, July recorded a relatively strong performance compared to June for 2016. July also had two additional weekend days compared to 2015, which allowed year-over-year results to improve to -4.5%, which optically looks much better than June's -8.5%. However, I suspect July's year-over-year change would have been fairly close to June's if the number of weekend days were the same in 2016 as in 2015.

August is the reverse of July in that it has two fewer weekend days (both compared to July 2016 and August 2015). This is likely to negatively weigh on August's relative results and leads me to estimate that August's year-over-year decline will be around -7% to -11%.

This sort of result may be seen negatively by the market as it would appear to be a worsening of trends compared to July. However, I would consider -7% to -11% to be an indication of a stable Macau (on a month-to-month basis), and a result towards the better end of that range would be a positive sign to me. Hence, I am currently neutral on Macau stocks and may later take a short-term negative position if early analyst estimates continue to be significantly higher than mine. If there is a later sell-off based on Macau missing analyst estimates, then I may reverse my position.

Macau casino companies include Las Vegas Sands (NYSE:LVS), MGM Resorts (NYSE:MGM), Wynn Resorts (NASDAQ:WYNN) and Melco Crown Entertainment (NASDAQ:MPEL).

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.