GGRAsia – Macau ops cut costs to offset wage hikes: Morgan Stanley

Macau ops cut costs to offset wage hikes: Morgan Stanley

Jan 14, 2015 Newsdesk Latest News, Macau, Top of the deck

Labour costs for Macau casino operators “might grow below consensus expectation of 10 percent to 15 percent in 2015,” as operators “began to take various cost-cutting measures,” Morgan Stanley Research Asia Pacific said in a report on Tuesday. The measures include offering employees leave without pay and making cuts to employee pension expenses, it added.

“Some operators started encouraging employees to take no-pay leaves, which is generally welcomed by the employees – most of them hardly took breaks in the last few years when demand was booming,” said the report by Praveen Choudhary, Alex Poon and Thomas Allen. “The companies could follow the same drill as in 2008/09 to cut pension plans in order to reduce costs,” they added.

Cost pressure on the operators is also expected to come via higher player reinvestment rates as the six Macau licence holders compete strongly for the high value Chinese players still coming to the city.

Macau-based casino operator MGM China Holdings Ltd said it is not expecting a sharp increase in labour costs this year, according to a note from UBS Securities Asia Ltd. The note is based in conversations with MGM China executives attending the UBS Greater China Conference in Shanghai this week. The brokerage didn’t name the MGM China executives to whom it had spoken.

“On labour issues, [the] company sees little chance of another step [sic] increase in unit labour cost (after 15 percent to 20 percent increase in 2014),” UBS analysts Anthony Wong and Angus Chan said in a note on Tuesday.

According to the note, MGM China “expects base wage increase of circa 5 percent, but combined with increases in benefits will mean total unit labour expense could go up [more than] 10 percent year-on-year in 2015”.

Last year, labour issues – relating to shortage of supply and higher wage demands – put pressure on Macau’s casino operators, as they competed for new workers and battled to retain experienced ones in preparation for the big Cotai resort openings starting this year.

“We currently forecast [about] 10 percent unit labour cost increase for the [Macau gaming] industry,” Mr Wong and Mr Chan said, referring to 2015 as a whole.

SJM Holdings Ltd, the operator of the casinos at Hotel Lisboa and Grand Lisboa, announced earlier this month a 5-percent pay rise for its staff in 2015, becoming the first gaming company to make an announcement about 2015 wage levels.

The Morgan Stanley report noted that the salary increase announced by SJM Holdings “was generally accepted by the employees,” as casino staff are aware of the declines in gross gaming revenue (GGR) since June.

Demand stabilising

According to the UBS note, MGM China said it sees signs of customer demand in Macau “stabilising at a low base, although uncertainty remains high”.

“In fiscal year 2014, we estimate MGM [China] delivered underlying mass growth of circa 33 percent, outpacing industry growth of circa 18 percent,” said the UBS research team.

“[The] Company stated that their premium segments (Supreme and Platinum) in mass actually grew faster than overall mass growth in fiscal year 2014, despite challenging industry conditions in high end demand since mid-2014,” said Mr Wong and Mr Chan.

“In VIP, [the] company believes challenges remain for smaller junket operators in the VIP segment, while larger junkets have remained more cautious in their extension of credit to customers, given the political environment in China,” they added.

Macau’s full-year 2014 GGR fell by 2.6 percent compared to a year earlier, according to official data. The market as a whole registered year-on-year declines in GGR since June – driven initially by a decline in VIP but more recently aided also by a deceleration in the mass segment.

“We currently forecast +4 percent/-11 percent mass/VIP growth for the industry in 2015, with MGM [China] conceding market share marginally,” UBS said. The brokerage estimates GGR to drop about 5 percent for full 2015.

Morgan Stanley said GGR in January seems to be stabilising, with the analysts expecting the first quarter “to be the bottom”. “With cost management, EBITDA [earnings before interest, taxation, depreciation, and amortisation] could decline less than revenue,” said the Morgan Stanley research team.