SINGAPORE (Sept 20): Morgan Stanley Research says its 2017 growth estimate of 4% y-o-y for global VIP gambling revenue is at risk, amid a “shrinking VIP world” despite better profitability outside Macau.

The risks are elevated by slowing macro-economic growth in China – the major source of VIP demand, Morgan Stanley says in a report on Sept 12.

Global VIP revenue fell sequentially by 3% in 2Q16, after being flat for the last two quarters, it said.

However, the research house points out that the decline narrowed on a y-o-y basis. Global VIP revenue fell 6% y-o-y in 2Q16, compared to a decline of 19% y-o-y in the previous quarter.

This was mainly due to Macau VIP revenue, which fell 21% y-o-y in 2Q16. And there is no recovery in sight, according to Morgan Stanley.

“No new VIP tables have been allocated to newer casinos since 2015 and smoking ban could be implemented in future,” it says.

Excluding Macau, global VIP revenue increased 27% y-o-y in 2Q16, reversing out of two years of negative growth. This was driven by new casinos in Saipan and Vladivostok, as well as junkets moving to low tax jurisdiction like the Philippines.

Morgan Stanley notes that casinos outside Macau generate higher EBITDA than the losses incurred by Macau.

“Due to tax differentials, outside Macau, casinos tend to make higher VIP EBITDA margins. This is positive for the gaming industry, as a higher percentage of VIP customers' revenue goes to listed companies' profits,” the research house says.

Morgan Stanley’s global gaming team says its preferred stock picks for the sector are Star Entertainment in Australia, Bloomberry in the Philippines, and Paradise City in Korea.

“We favour companies with strong junket/VIP offering destinations and new facilities driving market share higher,” the research team says.

Genting Singapore, however, received an “underweight” rating.

“We expect negative earnings revisions to continue, due to poor management of VIP business that resulted in high bad debts,” Morgan Stanley says, adding that Genting Singapore is “losing to MBS”.

“Although the market may view overseas expansion positively in Japan and Jeju, we are bearish on legalization of casinos in Japan and the ability to generate decent ROIC, and competition from Paradise City,” it adds.

Genting Singapore closed 2.0% higher at 75 cents on Monday.

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