Macau gami111814_FitchChart_300ng revenue is projected at 0% for 2014 and negative 1% for 2015, according to Fitch Ratings. Fitch's forecast reflects the persistent weakness in the VIP business, which seems to be spilling over to the premium mass segment.

We expect weakness in Macau to persist through 1H15 until Galaxy Entertainment and Melco Crown open the Galaxy Macau expansion and Studio City, respectively, and the negative VIP trends are lapped. Until then, we are modeling largely flat sequential growth, which yields around 15%-20% YoY declines through 1Q15 and about a 5% YoY decline in 2Q15. Thereafter, we are modeling sequential 5%-8% mass growth and 2%-4% VIP growth, with the growth ramping toward the back end of the year.

Our 2015 forecast may prove overly conservative if VIP bounces back to recent historical averages (around MOP18 billion per month since 2011 compared with about MOP15 billion since June 2014). However, the VIP bounce is unlikely, owing to the reduced VIP positions relative to 2013 and earlier in 2014 (Las Vegas Sands' VIP positions were down 20% in 3Q14 on YoY basis), general macro issues plaguing China (e.g. declining housing prices and tightening credit conditions) and what seems to be institutionalization of the Chinese government's crackdown measures (i.e. establishment of Act-Net). Also the gaming expansion in Philippines will draw some VIP business away from Macau.

We are also building a degree of caution into our mass growth assumptions as we think the aforementioned macro and crackdown issues affecting the VIP business overlap with the premium mass segment. The smoking ban may also shave off 1%-2% of growth.

Despite revisions, we do remain favorable on Macau, as we continue to hold that Macau and the greater China market remain underpenetrated. We expect gaming revenue growth will be driven by new supply and infrastructure development and that the Chinese economy will continue to grow (6.8% in 2015 and 6.5% in 2016), anchoring mass market demand.

We are monitoring margin pressure stemming from increasing labor costs and the intensifying promotional environment in the premium mass segment during 4Q14. However, as in 3Q14, margins should benefit from the mix shift toward mass. We will also closely monitor progress on the Cotai developments. From a credit point of view, construction slowdowns would not necessarily be viewed negatively, as they would provide the concession holders additional financial flexibility through the development and added time to better size the demand.