Coronavirus hits industry, but underlying demand seen strong

Looking at the Chinese New Year visitation figures for Macau, it’s difficult not to be pessimistic about the near-term outlook for gaming in Asia, though analysts say underlying demand remains strong and there is likely to be a snap back once the situation improves.

The Wuhan Coronavirus has killed 170 people, with almost 8000 confirmed cases as of Jan. 30. Cases have been reported worldwide, with the Philippines confirming its first outbreak on Thursday. Cambodia, Malaysia, Singapore, South Korea, Japan, Thailand and Australia are among the regional nations to have reported illness. 

In an effort to curb the spread, the Macau government cancelled all Chinese New Year festivities and extended the closure of government services for a further two days.

Inbound package tours from China have been cancelled, while the individual visa scheme, under which the most valuable of the casinos’ clients travel, has also been stopped. According to witnesses, shops, restaurants and casino floors are all but deserted.

Visitors to Macau over the Chinese New Year were down 90 percent over the prior year. While last week, Macau Chief Executive Ho Iat Seng warned the casinos may need to be closed should the situation deteriorate.

“The cancellations and dramatically reduced visitation point to a dreadful outcome for CNY in Macau and we would expect material y/y declines in January and February,” Bernstein Research wrote in a note, adding results for Q1 will most definitely be weaker than originally contemplated. 

The firm points out that over the past three years the 17 days surrounding the lunar holiday accounted for about 5.5 percent of annual gross gambling revenue, with January and February together making up about 16 to 17 percent of the year’s tally.

Sands China reported its Q4 results on Wednesday, with executives becoming the first of Macau’s six operators to comment on the impact of the virus. 

“The current situation is unique and serious,” Chairman and CEO Sheldon Adelson told investors. “Our top priority is the health and safety of our employees and guests, and we are doing everything we can to support the government, both in Macau and China.” 

Chief Operating Officer Rob Goldstein said the virus was impacting all areas of the business and noted that the ability to adjust fixed costs to mitigate the slowdown in revenue is minimal.   

Analysts point out that Sands had seen a strong start to the year, with the prospect of a trade deal between China and the United States removing one of the key drags of 2019. As a result, Jefferies said that Sands management indicated that underlying demand is strong.

“With the focus on 2020, visitation will remain weak with management unclear ‘when storm will end,” it said in a note. “Management highlight trade deal phase 1 is positive with a phase 2 deal possible and believe there is pent-up demand,” it said, adding that the virus will remain a headwind until the outbreak is controlled. 

Elsewhere in Asia, the virus has not yet had the same dramatic impact as in Macau, but analysts are seeking to assess the damage. 

Sands China noted that operations at its Marina Bay Sands property in Singapore had been affected, although so far nowhere near to the same extent as in Macau.

Maybank analyst Samuel Yin Shao Yang points out that the H1N1 virus that hit Asia from April 2009 to August 2010 and the Middle Eastern Respiratory Syndrome outbreak from May to July 2015, didn’t have a major impact in Singapore and Malaysia. Although the SARS pandemic of 2002 to 2003 did.

“Unfortunately, we opine that the Wuhan pandemic resembles the SARS one. The Wuhan pandemic’s epicentre is also China and while not as lethal, is more contagious than the SARS pandemic,” he writes. 

However, he urges investors not to be too averse to casinos in this area, as during the SARS epidemic the government in Beijing introduced the individual visa scheme, while the Malaysian government considered reviewing casino duties for Resorts World Genting. “There could be upside for GENM, GENT and GENS if the Malaysian government rolls back some of the 10ppt casino duty rate hike and/or the Singapore government rolls back some of the 50 percent casino entry levy hike during this Wuhan pandemic,” he said, referring to punitive tax increases imposed in Malaysia’s 2018 budget and a rise in entry fees for locals in Singapore. 

In Australia, J.P. Morgan says the Coronavirus will create a “less buoyant” environment for Chinese visitation, which had already slowed. Tourism arrivals have risen just 3.6 percent in fiscal 2020 to date, with China growth up 2.6 percent in July to Oct. Visitors from China make up about a third of arrivals to the country.

“Chinese tourists are the highest paying, segments of foreign visitors,” it says. “Casinos offer block rooms to draw in Asian tour groups, and EGMs have introduced games that target the Chinese casino-goer.”

Any fallout from the Coronavirus will add to an already weak tourism outlook for Australia due to the bushfires that have been raging across the country. 

The Philippines, one of the fastest growing markets in Asia again in 2019, is also bracing for a potential tourism slowdown, with the recent eruption of the Taal Volcano near Manila also likely to deter visitation.

“Lower tourist arrivals as a result of the virus scare will likely slow a steady and burgeoning source of foreign exchange although some tourists utilize payment apps and other forms of electronic payments to transact in the Philippines,” ING Philippines economist Nicholas Mapa wrote in a note. “Meanwhile, the more likely and direct impact on the economy will be on the consumption front as global travel is expected to slow altogether.”

In terms of its gaming industry, the Philippines has an advantage over some of its regional rivals, such as Malaysia, Vietnam and Cambodia, in that locals are able to gamble in casinos, providing a level of local support.

Still, there is little reason for upside across the region until the virus is brought under control.