A “worst case scenario” under the latest smoking rules for Macau casino main floors – that came into effect on Monday – is for a loss of up to 3.3 percent of gross gaming revenue (GGR) annually, and a 6.3 percent haircut for casinos’ earnings before interest, taxation, depreciation and amortisation (EBITDA).
The possibility is raised in a note on Thursday from Union Gaming Research Macau Ltd analysts Grant Govertsen and Felicity Chiang.
They wrote: “This analysis assumes that first half of 2014 VIP GGR would have been unchanged, while first half of 2014 mass and slot revenue would have been 8.9 percent lower. Based on the relative mix of VIP versus mass versus slot/ETG [electronic table game] GGR in first half 2014, the blended result is a 3.3 percent ‘decline’ in total GGR.”
Praveen Choudhary of Morgan Stanley in Hong Kong, said in a note in December 2012 – when Macau casino floors were still totally open for smokers – that the introduction of complete casino smoking bans in jurisdictions in the U.S. and Australia had resulted in annual gaming revenue falling by between “4 percent and 20 percent”, with the average being 12 percent.
But the picture in Macau has been clouded by casino smoking experiencing a lingering demise rather than a one-time outright ban.
On January 1, 2013, the city introduced a partial ban on the main floors, with casino operators allowed to allocate not more than 50 percent of their gaming areas to smokers.
But that policy came under pressure as much vaunted “air curtains” – extraction systems supposed to whip the smoke away from non-smokers’ lungs – proved of variable effectiveness.
Many casinos failed air quality tests mandated by the city’s Health Bureau under the policy. And the increasingly restive workforce of table games dealers – made up entirely of locals – started to become more vocal in their complaints about the risk to their health of concentrating smoking on certain parts of the floor.
After a lengthy consultation process, it was decided to ban smoking from all open areas of the main floors from October 6.
In return casinos were allowed to build on main floors enclosed smoking areas without any gaming tables or slot machines – similar to smoking lounges found at some airports. Casino managers have pointed out however that anything requiring a player to leave the table or the slot machine is likely to result in a drop in gambling yield from that player.
Smoking is still allowed in Macau VIP rooms – that provide around 60 percent of all Macau’s GGR – even under the policy introduced on Monday. Most VIP areas are in places physically separate from the main casino floor.
Casino operators had thought the exemption would also apply to premium mass areas provided they were in places – in the language of the guidance from officials – “of limited access to specific games and gamblers”.
In the end the government decided the mass floor ban applied to premium mass as well. That is likely to have proportionally the most impact on mass-market GGR given the high betting volumes typically seen in the segment.
On Monday, only 12 of Macau’s casinos and slot-machine parlours had smoking lounges in operation on their mass floors, according to the government. The Health Bureau confirmed later on that some of the city’s biggest and most profitable casinos had to go entirely smoke free on their main floors.
Union Gaming said in its note on Thursday however that it did not expect its worst-case scenario for GGR and EBITDA to be realised.
The analysts wrote: “We think the average casino patron typically will play on any single table for about 30 to 40 minutes. As such, the transit time between tables therefore becomes a natural time for a smoke break…”
The note said this was based on an average casino patron consuming two cigarettes per hour – a consumption rate it said was higher than the daily national average for mainland Chinese smokers as assessed by the medical journal The Lancet.
Another reason it cited for avoidance of the worst case was that Macau is a destination market – not a locals market as is the case with many U.S. casinos. As such, Macau gamblers were “unlikely to cut short or even cancel their visit due to smoking rules,” said the research house.
The analysts did say there were “probably not enough smoking rooms” at present, adding “…given the last minute rule change, we believe most (if not all) casinos will look to eventually add more smoking rooms to their floors, including in the premium mass areas which currently do not have smoking rooms.”
The research paper did caution however – referring to the recent street demonstrations by casino dealers for better pay and conditions – that “the recently-empowered casino dealers could continue to agitate (and threaten public unrest via marches and strikes) for a sooner-rather-than-later extension of the smoking ban to include VIP rooms.”
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”China has been strengthening the control over capital flow, and the impact of that has already been reflected [on Macau’s gaming revenue trend]. There should not be any bigger impact from the new… legislation [on the mainland] … on the gaming revenue trend here”
Wilfred Wong Ying Wai
President of Macau casino operator Sands China