The Macau VIP segment is likely to make a diminishing contribution – in proportional terms – to the city’s overall casino-related revenues in the next few years, a trend that has been in place for some time. That is according to brokerage Sanford C. Bernstein Ltd. Its analysts expect VIP gross gaming revenue (GGR) to account for just 34 percent of overall annual revenue – including gaming and non-gaming – in Macau’s casino sector by 2022.
Macau VIP baccarat GGR fell by 22.5 percent year-on-year in the third quarter, according to government data released last month. VIP baccarat revenue as a proportion of all casino GGR in the third quarter stood at 43.9 percent. In the preceding period, i.e. second quarter, it had been 47.2 percent.
“VIP as a percentage of revenues has declined considerably over the past decade,” Sanford Bernstein wrote in a report issued on Wednesday. “In 2011, VIP was approximately 70 percent of gross revenues (including non-gaming). In 2018, that figure was around 41 percent and by 2022, we forecast VIP GGR to be approximately 34 percent of gross revenues in Macau.”
The brokerage said it expected Macau’s casino sector to continue to be driven “by relatively stronger mass growth over the longer run”. That was despite short-term headwinds related to China’s economic slowdown and the ongoing sino-U.S. trade war.
“In the long run, continued improvements in transportation infrastructure, continued growth of the premium consuming class in China and new capacity will support long-term growth in mass,” said Sanford Bernstein.
Data from the Macau government shows that mass GGR – including slot machines – increased by 17.7 percent in year-on-year terms in the three months ended September 30.
Sanford Bernstein added that, were the relative revenue contribution from the VIP segment to decline in Macau as the institution expected, the segment’s contribution to the financial results of the city’s casino operators “would become less meaningful as well”. The brokerage expected VIP’s GGR contribution to industry earnings before interest, taxation, amortisation and depreciation (EBITDA) to decline to “approximately 13 percent in 2022”, down from approximately 42 percent in 2011 and approximately 18 percent in 2018.
The casino VIP and mass segments generate different EBITDA margins. That is related to expenses steaming from the payment of junket commissions and player rebates common in the VIP segment; in mass, levels of player reinvestment – including giveaways to players such as free rooms, food and beverage, gift items or free play – are usually much smaller than in VIP.
The Sanford Bernstein analysts added in their Wednesday note: “As the more stable contribution from mass (and non-gaming) dwarfs VIP contribution and VIP profit contribution shrinks, investor attention will continue to shift away from VIP.”
They added: “Historically, VIP has shown much more volatility than mass. Going forward, with expected structural growth in mass gaming continuing and relatively less contribution from VIP, we expect the industry to exhibit less volatility.”
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Vitaly Umansky, Louis Li and Shirley Yang
Analysts at brokerage Sanford C. Bernstein