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Fitch: 2014 Macau Growth Estimate Lowered Due to VIP Softness

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has lowered its 2014 Macau revenue growth estimate to 10% from 12% due to weakness in the more volatile VIP segment. The VIP weakness caused the overall market to realize its first negative monthly comp (negative 3.7% in June) in five years.

YTD though June, Macau revenues are up 12.6%, which is still above our initial full-year forecast of 12% in place since December 2013. While some weakness can be attributed to the World Cup and low hold during June, VIP softness has continued into July. We also believe VIP is being affected by the reallocation of tables toward the low-yield, high-margin mass market table games. Mass market continues to grow at above 25%.

Assuming low single-digit declines in VIP and 25%-30% mass growth for the remainder of the year, full-year revenues will come in at around 10%. Mass market will continue to be supported by longer-term drivers such as improved transportation infrastructure and growing middle-class in China, while VIP is more sensitive to macroeconomic factors in China. The Chinese government recently indicated that they will likely not employ an all-out stimulus, but will instead take a more measured approach (including providing access to financing and investing in infrastructure) to keep broader economic growth at around 7.5%.

Per the Macau officials' clarification, it appears that the prior concerns regarding UnionPay machines will not be a major issue. Existing machines in jewelry and pawn shops located near or in casinos will continue to process UnionPay transactions but will face a temporary moratorium on adding new machines. Access to UnionPay machines is important for the mass market as they help to distribute the maximum cash Chinese nationals are allowed to bring to Macau.

Another overhang is an almost full prohibition on smoking which will come into effect this October. We do not expect a significant change in visitation and think comparisons to markets such as Illinois are inappropriate given the lack of other convenient options for Chinese and Hong Kong nationals. That said, there could be some marginal impact on the mass side, as the time spent at the tables could be diminished (private rooms will have smoking).

Our Macau revenue forecast reduction was discussed in our Gaming, Lodging and Leisure (GLL) electronic newsletter. The e-newsletter includes brief sector comments, recent and upcoming events (including a discussion of regional US gaming markets and commentary related to our Midwest property tour), as well as links and summaries to rating actions and detailed reports. You'll also find links to GLL-related reports/comments from other Fitch Ratings groups including Leveraged Finance, Credit Market Research, REITs, Sovereign/Public Finance and Structured Finance.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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