Macau's casinos worryingly reliant on high-rollers

Hong Kong

A DROP in the number of Macau's high rollers may push the Chinese territory's gambling revenue to its first annual decline on record. Forecasts for next year seem over-optimistic. For many casinos in the coastal enclave, high-spending VIP gamblers are the biggest vulnerability. If they stop playing, the likes of Galaxy Entertainment and Wynn Macau would be particularly hard hit.

China's millennia-long love of gambling is unlikely to abate in the long term, as Las Vegas Sands boss Sheldon Adelson reminded investors on Oct 16. But short-term indicators are worrying. Macau's VIP gaming revenue fell 19 per cent for the three months ending September. In the whole of 2014, casinos' take from gamblers may fall by one per cent, Barclays estimates, and Macau's new casino-floor smoking ban could worsen that decline.

Revenue from the mass market, including that from slots, can make up for fewer VIPs in some cases. Such punters bring in less revenue, but are more profitable for casino operators. The Ebitda margin on VIP clients is around 10 per cent, according to analysts at Kim Eng Securities; the margin on mass gamers is about 35 per cent. Earnings can grow even if revenue does not.

Assume that next year, VIP revenue drops by 20 per cent, while mass gaming revenue rises just 10 per cent. Galaxy Entertainment, an operator that caters to high rollers, could see its Ebitda decline by up to 3 per cent, according to Breakingviews calculations. Wynn Macau's could slide by one per cent. Those with greater mass exposure would still see Ebitda increase. Sands China could see growth of 4.5 per cent.

Unless there is a let-up in China's anti-graft campaign, which has made things particularly uncomfortable for high-spending gamblers, analysts may be too hopeful. They, on average, expect Galaxy's Ebitda to rise 20 per cent next year, for example, according to Thomson Reuters data. That implies unlikely double-digit growth in revenue.

Of course, casinos can fight the fall-off. A spate of new openings starting next year may bring in new tourists. But staffing costs are rising, and Macau's era of fast growth seems to have been left on the table. Either way, those who go for the mass market have the best chance of beating the odds.

Macau gambling revenue for October could see the worst decline on record, falling 20-23 per cent year on year, Reuters reported on Nov 2. On Oct 28, Wynn Resorts, the US parent company of Wynn Macau, said that Macau revenue for the three months ending September was US$942 million, down 6 per cent from the same period last year. The Macau unit's Ebitda adjusted for property was US$326 million, down one per cent from the same period last year.

On Oct 16, Sands China said its revenue for the three months ending September was US$2.3 billion, 0.2 per cent lower than the same period last year. The Hong Kong-listed Macau casino operator's Ebitda adjusted for foreign exchange and property investments rose 3 per cent annually to US$811 million.

Sheldon Adelson, the chief executive of parent company Las Vegas Sands, told investors on Oct 16 that he believed Macau's downswing would reverse itself, saying "no one has ever suggested that the behaviour of Chinese and Asian people, which has been established over a 3,000-year history, is going to change."

Shares in Macau's six primary casino operators have underperformed Hong Kong's Hang Seng index by an average of 28 per cent since January.