UPDATE: Fitch Revises 2015 Gross Gaming Revenue Decline Estimate for Macau from 22% Previously to 29%

Fitch is revising Macau's gaming revenue growth rate for 2015 to negative 29% from our prior forecast of negative 22% following the gaming team's visit to Macau. The revision reflects continued revenue weakness through April, with daily GGR declining to MOP640 million in April, and our opinion that a strong rebound in average daily GGR is unlikely during the balance of 2015. Our new forecast, which sees 2015 GGR falling to USD31 billion, assumes daily GGR of MOP650 million to MOP680 million for the balance of the year, with the higher end of the range occurring toward the end of the year. The 2H15 improvement takes into account our opinion that the market is near the trough and that Galaxy Macau's phase II opening on May 27, as well as Melco's StudioCity opening in 3Q15, will drive some incremental, albeit limited, growth. Following our trip to Macau, we are generally more negative on the near- to medium-term prospects of Macau's gaming market. Several headwinds have come to the forefront that may impede mass market growth. The headwinds include the potential visitation cap on mainland Chinese residents mentioned by the Secretary for Social Affairs and Culture; a complete smoking ban in Macau's casinos proposed by the director of the Tobacco Prevention and Control Office; and delays in key transportation infrastructure projects, including the bridge to Hong Kong and the intracity light rail. The Macanese government seems to be keen on diversifying its economy away from gaming and is well positioned to weather the transition from gaming given its built up reserves and substantial, albeit deteriorating, surplus. Also, based on public comments, the government is willing to cut expenditures if necessary. The visitation cap, if implemented as proposed, would effectively cap the mainland visitation at the current level of 21 million per year. The aim of the cap is to control the overcrowding in Macau especially on the Peninsula. The concern of overcrowding is an older issue, and enforcement of the cap would have to be coordinated with the mainland government. A possible offset to the cap could be increasing the average length of stay, as mentioned by several parties on Fitch's visit. We calculate that an increase in the length of stay from 1.0 day in 2014 to 1.14 days will absorb the nearly 12,000 rooms coming on line through the current development cycle. There is consensus among operators that a full smoking ban will hurt revenues. Operators are speaking out against the full ban, but most believe that, despite their protests, a full ban will likely pass. Casinos currently allow smoking in airport-style smoking booths and in the VIP areas, although some operators are more liberal than others in designating smoking areas. Las Vegas Sands seemed most conservative, with limited booths throughout their casinos, and Melco Crown seemed most aggressive, with a large section of City of Dreams' mass floor designated for smoking. The bridge to Hong Kong, which is critical for connecting Macau to a major international airport, has been delayed. In our meetings, we could not get a consensus for the cause of the delay or the new opening date. The best-guess opening dates varied from 2017 to post-2020, and the stated possible causes for delay also varied; however, there was general agreement that there is a lack of political urgency on the Hong Kong side to open the bridge. Progress on light rail is being impeded due to the logistical challenges of developing large scale projects on the congested Peninsula. (Light rail line and stations looked nearly complete in sections of Taipa and Cotai). Fitch's long-term positive outlook for Macau remains intact as we continue to believe the APAC region is underpenetrated, at least as far a mass market is concerned. However, it appears that Macau is now in a "new normal," and it may take several years before the market returns to above USD40 billion in annual gaming revenues. Additional information can be found in Fitch Ratings' Gaming, Lodging and Leisure (GLL) electronic newsletter, including brief sector comments, recent/upcoming events and links/summaries to rating actions and detailed reports. Links to GLL-related reports/comments from other Fitch groups, including Leveraged Finance, Credit Market Research, REITs, Public Finance and Structured Finance can also be found there.