Macau operators win smoking ban reprieve, but for how long?

Macau’s casino operators, who have put up a united front in opposing a proposed blanket ban on smoking, may have won a battle with signs the government is softening its stance, but have not yet won the war.

On Friday, July 10, a bill proposing a full smoking ban in casinos passed its first reading by an almost unanimous vote of 26-2 in Macau's Legislative Assembly. The bill, which will return to the Assembly for the second and third reading after a working committee examines the situation and issues a report, would remove the airport-style smoking lounges currently in place in casinos and would ban smoking in private rooms occupied by VIPs from 2016.

But after appearing firm in its resolve to make smoking in casinos a thing of the past, the government has mellowed its tone and says it will consider keeping the lounges.

“Some legislators seem very confident about establishing smoking lounges that can scientifically and effectively prevent the health of gaming workers and tourists being affected by tobacco,” Secretary for Social Affairs and Culture Alexis Tam was quoted as saying by local media after attending the plenary session.

“[The decision allowing smoking lounges] will depend upon their proposals,” he said.

The onus is now on the operators to prove that the smoking lounges are effective in mitigating the potential health problems created by smoking.  And that may be a tough call.

A 2007 World Health Report found smoking rooms "may reduce but not eliminate the exposure to SHS [second-hand tobacco smoke] inside the DSR [designated smoking room].

"In addition, DSRs do not eliminate non-smokers’ exposure to second-hand smoke in adjacent spaces, offer no protection to workers required to work in them, and may also intensify exposure of smokers to SHS, thus increasing risks to their health."

"For example, the door to the designated smoking room can act as a pump moving smoke out of the room when people enter and leave the room."

Analysts say it’s hard to tell if the government’s change in attitude is due to pressure from the industry, or if it is realising that with a shrinking economy it makes sense to not squeeze its biggest money maker, which contributes 80 percent of state revenue. 

Bernstein Research analysts say a theme has emerged in which the government has been backtracking on the tougher policies it has been looking to implement likely due to the contraction in the economy.

Macau saw its Gross Domestic Product decline 24.5 percent year-on-year in 15Q1 and the government fiscal surplus decline by 58.3 percent in 15H1.

Bernstein says indicators of the government’s softening can be seen in the transit visa policy being reversed to allow Chinese passport holders entering Macau for the purpose of onward travel to stay for seven days as opposed to five; abandoning the cap on Chinese visitors at 21 million for 2015; and now a potentially relaxed smoking bill.

Operators have warned that a full smoking ban will further hurt revenue, which posted the 13th consecutive monthly decline in June. They say it will also lead to further job losses in the industry.

The companies also complained about the waste of time and money already incurred in installing the smoking lounges after the original partial ban came into effect in October last year.

UBS analysts say the partial smoking ban on mass floors has clearly had a negative impact on demand. UBS said operators have noticed changes in player behavior such as placing lower average bet sizes to go for a smoking break disrupting the game.

“It is hard to exactly quantify changes in player behaviours, but if the bill pushes through, we think it is reasonable to assume 10-15 percent drag on VIP (already in our numbers), and possibly -10 percent impact on mass/slot revenues,” UBS said.

Fitch revised its 2015 Macau gaming revenue growth forecast to negative 29 percent from negative 22 percent, reflecting the proposed visitation cap and full smoking ban, while Deutsche Bank also expects a full ban to knock 10-15 percent off VIP revenue.

Macau’s six casino operators, in a rare show of unity, clubbed together and launched an independent study on attitudes of employees towards the ban in an attempt to sway the government.

The study showed that among almost 34,000 participating employees of the six casino operators, 66 percent supported the retention and development of smoking lounges within the casinos.

The respondents comprised 81 percent gaming and 19 percent non-gaming employees, including smokers and non-smokers.

The study adds that VIPs would reduce their visits to Macau by 17 percent and their length of stay by 24 percent with a full smoking ban in place. Furthermore, 32 percent said they would travel to alternative gaming destinations due to the fact that these places allow smoking inside casinos. The findings also say that 47 percent of VIP customers and 31 percent of mass customers are concerned that a full smoking ban will have a detrimental impact on employment and Macau’s economy more generally.

The president of the Macau Junket Operators Association, Kwok Chi Chung, told local media that 3,000 to 5,000 employees working for the city’s junket operators might be affected if the ban is implemented.

“As the bill has been passed to the Legislative Council for discussion, we hope that the government and legislators will take objective views and carefully consider all the implications that an enactment of a full smoking ban would have so that Macau’s proposition as a World Centre of Tourism and Leisure is not compromised, particularly if alternative solutions are available, such as retaining and regulating smoking lounges in casinos,” said Benny Sea from Pulse Communication, a PR agency representing the six casino operators.
 But even if lounges are kept in casinos the ban is still expected to extend to VIP rooms - which represent 50 percent of market revenues. Wells Fargo analyst Cameron McKnight said smoking lounges would cushion the blow of any revenue declines in the VIP sector meaning mass revenues “don't get worse”.

David Bain, analyst and managing director of Sterne Agee, said the government will have to weigh up the arguments on the one side which include dealer complaints citing health concerns, Macau resident sentiment, and Mainland China’s policy framework, while on the other side considering the potential loss of revenue for the industry and government and the millions of dollars lost in building the lounges to appease the government after the initial ban was introduced.

 “We believe the Government’s public vacillation is a result of the typical push and pull any Democratic Government must navigate through if so forced by its constituencies and large revenue and tax generators in the media.  Clearly, however, those at the higher echelons of Macau Government – and likely those within the Beijing Government - were viewing a full ban on the road map for Macau.”
“We would suggest that there has not been a complete turn of direction in mandate.”