Macau casino operator non-gaming revenue “may never reach” the heights of the Las Vegas market in the United States, where it accounts for approximately two-thirds of all casino resort revenue, says a report from the Morgan Stanley banking group.
“Non-gaming revenue as a percentage of total revenue is roughly 12 percent for Macau and may never reach 65 percent as it has in [Las] Vegas,” stated analysts Praveen Choudhary, Jeremy An and Thomas Allen.
They further noted in the Monday report: “Slot machines are roughly 50 percent of total gaming revenue in Vegas, while Macau generates only 5 percent from this segment.”
According to official data, gross gaming revenue from slot machines in the Macau market was approximately MOP13.16 billion (US$1.63 billion), up 15.6 percent from the previous year. Macau’s accumulated casino GGR for full-year 2017 grew by 19.1 percent year-on-year, to MOP265.74 billion.
In Macau’s Five-Year Development Plan – a package of policies and initiatives covering the period 2016 to 2020 published in 2016 – the city’s government stated that non-gaming revenue within Macau’s casino sector should account on average for at least 9 percent of all revenue generated by Macau operators by 2020.
A report in January last year from Macau’s Statistics and Census Service indicated the goal had already been achieved by the end of 2015. That year, non-gaming accounted for 9.39 percent of overall revenue in the casino sector.
The Morgan Stanley analysts noted, referring to the Macau-market contribution from non-gaming and from slot machines: “We do not expect either number to change meaningfully for Macau any time soon.”
But they did suggest there was ongoing potential for a change in the gaming revenue mix in Macau in favour of the more profitable mass-market. The Macau government wants to see non-gaming as a percentage of total revenue from the local casino industry rise, as part of its programme of economic diversification and movement away from dependence on high-stakes VIP gambling. A number of investment brokerages have noted that earnings from VIP are potentially volatile for reasons related to regulation and politics in the main feeder market, mainland China.
“The market tends to put a discount on the valuation of VIP-centric companies, due to the high volatility of volumes and regulatory risks,” said Morgan Stanley.
In gross revenue terms Macau non-gaming amounted to US$4.1 billion in 2017, excluding any contribution from so-called satellite venues – those owned by third parties but relying on the gaming permit of one of the six operators – said the bank.
The report’s analysts noted there were some structural issues with Macau casino operator non-gaming revenue that potentially caused some of it to be a proportionally smaller contributor to profit for those businesses than the gaming side.
“Most of the companies carry EBITDA [earnings before interest, taxation, depreciation and amortisation] margins of about 10 percent for VIP, 30 [percent] to 40 percent for mass and 30 [percent] to 50 percent for slots,” stated the report authors, citing information for Macau gaming operators and proprietary research.
“For non-gaming, retail rental carries the highest EBITDA margin of 75 percent… and other segments are mostly below 35 percent or sometimes close to zero,” they stated, adding that retail and hotel operations in combination accounted for more than 60 percent of gross non-gaming revenue.
Morgan Stanley noted that while gross gaming revenue in Macau attracted an effective tax rate of 39 percent, non-gaming was the only casino operator segment to have applied a corporate income tax of 12 percent.
But the bank added: “We believe the industry will see declining VIP contribution as has been the case since the second half of 2011, when VIP represented 75 percent of GGR; it now contributes about 50 percent of revenue and 10 [percent] to 20 percent of EBITDA. Also, the VIP business is under greater scrutiny as it has been made the subject of a regulatory clampdown.”
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DS Kim, Amanda Cheng, and Livy Lyu
Analysts at JP Morgan Securities