GGRAsia – Global 2Q VIP weighed down by Macau: Morgan Stanley

Global 2Q VIP weighed down by Macau: Morgan Stanley

Sep 13, 2016 Newsdesk Latest News, Macau, Top of the deck

Global VIP casino gambling revenue – excluding Macau – increased by 27 percent year-on-year in the second quarter of 2016, after two years of contraction, says a report from the Morgan Stanley banking group.

“Part of that was driven by new casinos in Saipan/Vladivostok and part from junkets moving to low tax jurisdiction like the Philippines,” said Monday’s report.

It was referring first to Imperial Pacific International Holdings Ltd’s casino venue in the United States’ Commonwealth of the Northern Mariana Islands; second to Tigre de Cristal, a casino resort in the Russian Far East promoted by Summit Ascent Holdings Ltd, a firm controlled by Asian gaming entrepreneur Lawrence Ho Yau Lung; and third to new casino resorts that have opened in Entertainment City, Manila, in the Philippine capital.

At the same time, a recovery of the Macau VIP market “is not in sight”, said the bank in its Monday report.

“Macau VIP revenue fell 13 percent quarter-on-quarter [and] 21 percent year-on-year in the second quarter 2016. No new VIP tables have been allocated to newer casinos since 2015 and [a] smoking ban could be implemented in future,” said the institution. The Macau government said the year-on-year fall in VIP baccarat revenue was 16 percent in the second quarter.

Morgan Stanley’s references to tables and smoking were, respectively, to the Macau government’s policy of capping the number of new-to-market live dealer gaming tables allowed in the market; and the possibility of a total ban on smoking in the city’s casinos; which some analysts have said could depress gaming revenue if players have to leave the table to indulge their tobacco habit.

Brokerage Union Gaming Securities Asia Ltd had said in a note in August that Macau VIP revenue was “performing worse” that official data suggested. Union Gaming suggested the discrepancy between the regulator’s numbers and those of the market was because some operators reported their casino revenue in a different way to the gaming bureau than they did to their investors.

The lacklustre performance of the Macau VIP market in the second quarter this year had contributed to a -6 percent slide year-on-year in global VIP gross gaming revenue (GGR); although that was a narrowing from the -19 percent performance year-on-year in the first quarter, said Morgan Stanley.

Push and pull factors

The institution said it anticipated that VIP gambling business would continue to find destinations outside Macau attractive; given the ‘push’ of China policy – making it harder for Chinese high rollers conspicuously to splash their cash in Macau – and the ‘pull’ of lower overheads in some places outside Macau.

Macau VIP gambling room investor Iao Kun Group Holding Co Ltd announced on September 2 it would be undertaking a “comprehensive strategic review” of its VIP gaming room operations in Macau. As an initial cost-cutting measure, Iao Kun said it had closed its VIP gaming room at Sands Cotai Central – a property operated by Sands China Ltd in Macau’s Cotai district – with effect from August 31.

“We think casinos and junkets earn higher margins from VIP business outside of Macau,” said Morgan Stanley.

“Comparing EBITDA [earnings before interest, taxation, depreciation and amortisation] margin net of income tax across major countries, we find that EBITDA margins (to casinos) in Australia, Philippines and Cambodia are higher than Macau. In addition, rebate/commissions as percentage of VIP revenue are higher outside of Macau, driving higher profitability,” added the institution.

“We think outside of Macau will continue to gain share given lower effective tax rate, easing visa policy for Chinese outbound tourists, improving infrastructure and player anonymity, driving higher profitability for junkets/casinos.”

Macau has an effective tax rate of 39 percent on casino gambling. Australia has differing rates set at state level, but typically the tax rate on VIP play is lower than for the mass market. All rates are well below Macau’s effective rate.

Clarity on gambling tax rates in the Philippines has been muddied by the recent debate over corporate tax liability for private casino operators in that country. But prior to a 2014 ruling from the Philippine Amusement and Gaming Corp (Pagcor) regarding corporate tax, the casino regulator had been imposing a 15 percent levy on GGR from casinos’ high roller tables and junket operations; and 25 percent on gross revenue from mass-market tables, slot machines and electronic gaming machines.

Cambodia currently has no gambling tax but instead has flat taxes levied on gaming tables and gaming machines; although the country is considering passing a gaming law that might bring in a gaming tax.

In Russia, Tigre de Cristal’s tax payments are in the form of a levy per slot machine per month of RUB7,500 (US$116). There is also a levy per table per month of RUB125,000.