Morgan Stanley sees upside in lower Macau labor costs, but expects project delays

Wednesday 14th of January 2015

Morgan Stanley says Macau labor costs may be lower than the 10 to 15 percent increase most operators had been predicting for 2015 as casinos take measures to trim spending, though it sees rising capex costs and construction delays potentially reducing the return from Phase 2 projects.

In a note, the U.S. bank said it now expects 2015 gross gambling revenue to be down 7 percent, following a 2.6 percent drop in 2014. That’s worse than its prior forecast for a decline of 4 percent.

The reduction comes on the back of an expected decline of 11 percent in the VIP market, down from 7 percent estimate and a forecast for the mass market to slip 1 percent compared with its prior outlook for zero growth.

However, on the brighter side, Morgan Stanley says that labor costs may be less of a problem than operators had been anticipating at a conference in November.

Some companies have been encouraging employees to take no-pay leaves, which has been generally welcomed by employees, the bank said..

Also, the 5 percent pay increase recently announced by SJM Holdings was generally accepted by employees.

“Casino staff are aware of the seven consecutive YoY declines in GGR for the industry, hence, they are willing to compromise,” it said.

The bank also noted that companies may also seek to cut pension expenses to protect their margins. It said in the 2008/2009 downturn Sands China reduced pension payments and SBC by more than 6 percent compared to a 6 percent cut in wages and 17 percent cut in headcount.

On the downside, Morgan Stanley analysts, who recently visited Macau, said they expect higher capital expenditure and delays of a couple of months for most of the upcoming casino projects.

As a result it has reset its expectations for return on invested capital to between 15 and 20 percent from 20 to 25 percent previously.

That said, it’s confident Galaxy Entertainment remains on track to open on time since it has recently started hiring hotel staff for its two new hotels.