A full smoking ban in casinos, including VIP rooms, will have a negative impact on VIP revenue in Macau, say several brokerages. VIP revenue could fall by as much as 15 percent, suggests Deutsche Bank AG analyst Karen Tang.
On Thursday, the Macau government said it would propose a full ban on smoking inside casinos. The ban would prevent smoking even inside VIP rooms and would also mean that smoking lounges on mass floors would no longer be allowed. But Macau’s Secretary for Social Affairs and Culture, Alexis Tam Chon Weng, admitted it is unlikely the changes will be approved by the city’s legislature before this summer.
“We estimate that the smoking ban on [the] mass gaming floor since October 2014 had a 10-15 percent impact on mass gaming revenue. If [the] smoking ban is extended to VIP rooms in the second half of 2015/2016, the impact on VIP revenue may be similar,” Hong Kong-based Ms Tang wrote in a note on Thursday.
She added that Galaxy Entertainment Group Ltd and Wynn Macau Ltd may be the gaming operators feeling the greatest impact from the proposed measure, given their high exposure to VIP play.
The poor results of the VIP segment have been one of the major factors affecting Macau’s gaming industry performance. Total gross gaming revenue (GGR) has dropped for seven consecutive months measured in year-on-year terms.
VIP gaming revenue in Macau fell by 29.0 percent year-on-year in the fourth quarter and 10.9 percent for the full-year of 2014, according to official data published earlier this month. VIP casino revenue accounted for 61 percent of all casino revenue during the fourth quarter of last year.
The Macau government’s proposal was announced on the same day the city’s Health Bureau published its three-year review on the implementation of a smoking ban in certain public spaces. That ban was first enacted in 2012 and gradually widened.
According to rule changes enacted on October 6, smoking on casino main floors in Macau is now only allowed in enclosed smoking lounges that do not contain any gaming tables or slot machines. But puffing a cigarette while gambling is currently still allowed in VIP rooms.
Macau residents in favour
The Health Bureau’s review proposed extending the smoking ban to all areas inside casinos.
The review highlighted that around 58.4 percent of casino workers do not like working in VIP rooms where smoking is allowed. It also added that 75 percent of Macau residents support a full smoking ban in casinos.
Mr Tam said during his Thursday announcement that in meetings with representatives from the six gaming operators, they had requested permission to keep their gaming-free smoking lounges. But Mr Tam stressed the surveys done by the Health Bureau show the majority of Macau’s population was in a favour of a full ban, as many people claimed that even restricting tobacco use to enclosed smoking lounges would compromise air quality inside the casinos.
Investment analysts DS Kim and Daisy Lu, from JP Morgan Securities (Asia Pacific) Ltd, wrote on a note on Thursday that a full ban “was just a matter of time”, after the Macau government had already hinted it could introduce changes to the smoking ban next March.
“Since then, we believe it has been a consensus in the market as well as the industry that [a] full smoking ban is inevitable and just a matter of timing,” the Hong Kong-based analysts wrote.
They added: “We believe [a] potential full smoking ban could have… around 10 percent impact on VIP and ‘reclassified’ premium mass revenues. Therefore, considering these two segments collectively generated 62 percent of total gaming revenues in recent months, potential full-smoking ban could hurt gaming demand by 5 percent to 6 percent”.
But the JP Morgan analysts noted that the impact on gaming operators’ profits however should be smaller, “given relatively lower margin for those segments” versus mass gaming revenue.
The Star City example
Analysts from Wells Fargo Securities LLC led by Cameron McKnight said the impact of a full smoking ban in Macau should hail similar results to what happened at Star City casino property in Sydney, Australia in 2007.
“We believe the mid-2007 smoking ban at Star City [now known as The Star] in Sydney, Australia, is the closest comparison to Macau’s given its high mix of Asian customers and ‘destination-like’ characteristics. During the first year of the smoking ban at Star City, mass table and slot revenue growth dropped around 3 percent and around 10 percent points, respectively,” said the Wells Fargo team.
Macau-based analysts Grant Govertsen and Felicity Chiang from Union Gaming Research Macau Ltd expect a smaller impact on GGR from a full smoking ban in Macau.
“Our best guess is that the current smoking ban has had about a 300 basis points impact on mass market table GGR – although this is with the benefit of having smoking lounges on the mass market floors. We would expect a similar impact on VIP GGR should the ban be extended to the entire casino and under the assumption that smoking lounges are still allowed.”
They added: “Under the assumption that this proposal will be submitted to the legislature during the first half of 2015, we would expect debate (and hopefully some modification) before passage at some point during second half of 2015. We would then expect an implementation no later than early 2016.”
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Credit rating agency Fitch Ratings