Mass market holding up, but not helping profit margins, analysts say

Monday 5th of October 2015

Macau’s operators are so far seeing little benefit to their bottom line from a shift in the business mix from the high roller to the mass market, though the mass segment does appear to be holding ground, analysts say.

CLSA Research said after a series of investor meetings it is “assured” of the sustainability of the mass segment in Macau, but continues to expect VIP to remain pressured.

The mass-market business in Macau has softened, despite a positive show of foot traffic, but not to the extent seen in the VIP business, the analysts wrote in a note.

“While weekend tables were full in select casinos (Venetian, MGM, Grand Lisboa), and foot traffic on the main floor generally appeared to be robust, the intensity of play behind closed doors (in the VIP private rooms) is the slice of the business that has been decimated,” the note said, adding that overall visitation to Macau has declined by roughly 4 percent year-to-date.

The analysts say any softness in visitation is imperceptible from the main floor; “the real pain is felt in the VIP business,” where gross gaming revenue is down about 60 percent from the February 2014 peak.

And such woes in the VIP segment are unlikely to abate soon.

“We expect the VIP segment to remain pressured, driven by a combination of weak China macro and a continued anti-corruption push, which has shown no signs of easing.”

However, Deutsche Bank noted that although the mass business tends to be higher margin, ongoing cost pressures mean operators are not seeing the benefit.

DB analysts said the mass gaming segment yields anywhere from a 20 to 30 percentage point margin profile advantage relative to VIP, but “a meaningful pickup in mass revenue, as a percentage of the mix, has not led to improving margins.”

As VIP declines started back in the 14Q2, the commonly held perception was that mass growth would offset the VIP declines and EBITDA would continue to trudge along, said DB.

“When mass GGR rolled over in the 4Q14, the common refrain shifted to that of an improving mass mix benefiting margins as VIP declines were steeper than the declines in the mass segment. However, when looking at the data, it suggests that this, in fact, has not been the case.”

Mass revenue has gone from 36 percent of the GGR mix in the 13Q3 to 14Q2 period to 44 percent of the GGR mix in the 14Q3 to 15Q2 period.

The muted impact of mass mix on EBITDA margins is down to reasons such as reduced play levels and wage increases which have elevated what are essentially fixed costs in Macau.

“Historically high margin hotel and retail segments have been declining as reduced occupancy has led to lower rates while reduced VIP activity has led to lower spend in the retail segment and consequently, lower high margin turnover rent revenue.”

Regarding table allocation, CLSA says it is not “overly concerned” given operators can move under-used tables from existing properties to new properties to fill capacity.

“In fact, we believe operators should be happy to receive just 150-200 tables in the current environment since each additional table granted is an implicit directive from the government to hire more Macanese workers, which would apply further pressure on payroll expense.”

CLSA expects Macau Studio City to receive 150 to 200 tables for its opening, in line with consensus and in line with the 150 tables received by Galaxy for its recent Phase 2 opening in May 2015.

Bricks & Mortar Mass Gaming Cost pressures VIP