Saturday, July 02, 2022

Smoking rules to trim 2019 GGR, but China a bigger concern


Many of Macau’s casinos are in a race against time to ensure their newly-equipped VIP smoking lounges have been approved by the authorities.

New Year’s Day will mark the conclusion of a one-year grace period afforded to operators to comply with a legislative amendment to the Regime on Tobacco Prevention and Control, which since October 2014 has outlawed smoking on mass-market floors in casinos.

Under the amendment, passed by Macau’s Legislative Assembly back in July 2017, casinos that wish to retain tableside smoking in VIP areas have to meet certain technical specifications, which are then approved by the Macau Health Bureau.

The requirements include having tables or machines at least three metres from a single lounge entrance, which must have automatic sliding doors; adequate ventilation; ensuring cleaning staff wear protective masks and are only allowed into the room two hours after the last cigarette or cigar has been stubbed out; and displaying information about the dangers of smoking.

Each room must be fitted with an alarm system if the entrance’s doors have been left open for more than 60 seconds or if the level of ventilation drops.

Aside from a handful of casinos that have larger premium smoking areas, significant structural work has been avoided by the majority of venues and redevelopment costs have been relatively easy to absorb.

However, according to the Health Bureau, just 27 of Macau’s 47 gaming establishments submitted applications for smoking lounges before the September 28 deadline that had been set for those wishing to keep their VIP smoking areas open from January 1. Less than half of the applications – from some venues operated by the likes of SJM Holdings and Melco Resorts – had been approved by the middle of October, leading to a likely bottleneck in the final weeks of 2018.

Casinos found to be allowing smoking in unapproved lounges face a fine of up to MOP200,000 ($25,000) and the closure of the room. Moreover, the level of enforcement promises to be stringent.

Back in January, the Health Bureau carried out nearly 3,000 inspections on the very first day of the new smoking regulations becoming applicable for other indoor venues, as well as public transport stops, across Macau. A total of 236 inspections were conducted at casinos in the first quarter of the year, primarily focusing on the mass-market floors.

Additionally, pressure exerted by casino employees on operators to make the necessary changes have alerted the authorities. A review by the Health Bureau, carried out after the October 2014 rules were introduced, found that nearly six in 10 casino employees in Macau did not like working in VIP smoking lounges. A survey last year by the Macau Gaming Enterprises Staff Association of the Federation of Trade Unions found that seven in 10 casino workers would support a blanket ban on smoking within the venues.

It is understandably a prickly topic for operators – six of whom declined to comment on their preparedness for this article – and the precedent of the previous clampdown four years ago would provide a grim forecast for 2019.

According to the government’s own figures, VIP gross gaming revenue (GGR) still accounted for 61 percent of all casino revenue despite having slumped by 29 percent year-on-year in the fourth quarter of 2014.

However, it should be noted that Macau’s casinos were enduring a broader downturn at the time that has since reversed, with Deutsche Bank AG analyst Karen Tang having estimated the impact of the smoking ban at reducing mass-gaming revenue in the final three months of 2014 by between 10 percent and 15 percent.

Vitaly Umansky, senior research analyst of global gaming at Sanford C. Bernstein, said that operators were “caught off guard” in 2014 by late amendments to the regulations.

“This time, it has been well telegraphed for some time and the technical specifications have been laid out very clearly, so there should be less disruption,” he said. “The junkets I’ve spoken to believe it could be a 5-10 percent headwind, but I think there could be a couple of percentage points blown out of GGR next year.”

Umansky pointed out that Macau’s legacy properties, situated on the peninsula, are likely to be affected more by the changes. Casinos that have opened over the past four years – such as the huge Wynn Palace, for example – are already smoke-free.

More broadly, Umansky has estimated mid-single-digit GGR growth of about 5 percent at Macau casinos in 2019, with VIP GGR being close to flat.

“The impact of the smoking ban could be 2-4 percent on GGR, but I expect it will just be temporary,” he added. “If casino GGR is up 10 percent with smoking and therefore up 8 percent without smoking, then no one will really notice, but if GGR is below expectations, people will notice.”

The impact will come with game-play disruption, as smokers slip away from the table or machine for a cigarette.

Macau’s reputation as a destination market though – where people visit specifically to gamble and therefore do not have a cigarette and opt to drive home – should provide a degree of insulation against headwinds.

However, China’s GDP, which has slipped to the slowest quarterly growth levels between July and September 2018 since the global financial crisis a decade ago, is of more concern to operators.

“The smoking rules will make an impact, but it won’t be the end of the world,” Umansky said. “The biggest influence on performance will not be the regulations; it will be the strength of the Chinese economy.”

 

Asia Gaming Brief is a news and intelligence service providing up to date market information for worldwide executives on relevant gaming issues in Asia.

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