Rising costs of gaming sales for Macau casino operators are mentioned by several investment analysts in recent notes.
Cameron McKnight, Rich Cummings and Tiffany Lee of Wells Fargo Securities LLC, said in a note on Thursday that “significant overhangs in Macau…weigh on the near-term outlook”. They included “tight dealer labour supply and wage inflation pressuring margins,” the team said, referring to Macau’s 1.7 percent unemployment rate, and the requirement that casino table games dealers must be Macau residents.
Karen Tang of Deutsche Bank AG in Hong Kong, stated in a note on Wednesday issued after the latest Wynn Resorts Ltd results, that “cost pressures were evident” for Wynn Macau Ltd during the fourth quarter.
Back on January 13, a Morgan Stanley Research Asia Pacific team led by managing director Praveen Choudhary, mentioned Macau operators had started to take “various cost cutting measures” to combat rises in local wage costs.
The Morgan Stanley team, including Alex Poon and Thomas Allen, followed up that institution’s January 13 commentary on Macau margins; with notes on January 30 and February 5, about the fourth quarter results of Sands China Ltd and Wynn Macau respectively.
The analysts indicated likely causes for margin erosion included increased competition among operators for access to those high-value Chinese gamblers that are still coming to Macau.
VIP gross gaming revenue (GGR) 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 last month.
Morgan Stanley said in its January 30 note, referring to Sands China’s high limit mass-market table games business: “We estimate premium mass EBITDA margin [on earnings before interest, taxation, depreciation and amortisation] could have dropped to 25-30 percent in the fourth quarter of 2014, due to lower table yield and higher promotions.”
The bank added: “It could fall more in 2015 on current run-rate and further in 2016 if ramp up of Parisian is slower than expected and promotion wars intensify,” referring to Sands China’s US$2.7-billion French-themed resort currently under construction.
“We expect EBITDA margin (net) to fall 1.4 percentage points in 2015 and 2.6 percentage points in 2016,” Morgan Stanley added.
But the research team stated that positives for Sands China included low exposure to the VIP gambling segment relative to some of its Macau market rivals. It estimated that under 15 percent of Sands China’s EBITDA comes from VIP play.
Morgan Stanley also said it “liked” the fact Sands China’s pre-interest and pre-tax earnings (EBIT) on retail operations rose 12 percent year on year in the fourth quarter, representing 21 percent of property EBIT.
The bank added: “We expect absolute regular dividends to rise steadily in the next few years, despite muted special dividends.”
Mixed reviews for Wynn
Morgan Stanley was more bearish on Hong Kong-listed Wynn Macau.
“Wynn’s profit reliance on VIP is among the highest in Macau, which poses higher risks,” said the research team in Thursday’s report.
Mr Choudhary and his researchers added that Wynn Macau’s staff costs had increased, while Wynn Macau EBITDA had declined 26 percent quarter-on-quarter and 36 percent year-on-year in the fourth quarter.
“Staff costs as a percentage of revenue and [of] EBITDA surged to 10 percent and 42 percent, respectively,” they wrote. “Of the margin decline of 260 basis points (bps) quarter-on-quarter on gross revenue, 50 bps can be attributed to mix shift and the remainder to lower hold and negative operating leverage from weaker revenue and rise in staff costs.”
Union Gaming Research Macau Ltd analysts Grant Govertsen and Felicity Chiang noted however: “Wynn Macau has begun to experience an uplift in mass-market revenues on the heels of a direct marketing initiative that incentivised players appropriately (rooms).”
Union Gaming added: “We would look for Wynn Macau to be a share taker on the heels of refreshed premium mass and VIP supply coming back online soon,” referring to a renovated west wing of the casino expected to be operational before Chinese New Year, which falls on February 19.
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”The notion that somehow the Macau gaming companies can be used by China as negotiating pawns in a geopolitical negotiation with the U.S. is definitely without merit”
Vitaly Umansky, Louis Li and Kelsey Zhu
Analysts at brokerage Sanford C. Bernstein Ltd