Posted January 31, 2015 4:42 pm by Comments

Quoting several brokerages, a lengthy article in GGRAsia says a proposed full smoking ban in Macau casinos, including VIP rooms, will have a negative impact on VIP revenue. For example: DS Kim and Daisy Lu from JP Morgan Securities (Asia Pacific) Ltd, who wrote in a research note on Thursday that a full smoking ban “was just a matter of time” given the hints already dropped by the government (Note: 75% of Macau residents support a full ban), had this to say:

“Since then, we believe it has been a consensus in the market as well as the industry that [a] full smoking ban is inevitable and just a matter of timing… We believe [a] potential full smoking ban could have… around 10 percent impact on VIP and ‘reclassified’ premium mass revenues. Therefore, considering these two segments collectively generated 62 percent of total gaming revenues in recent months, potential full-smoking ban could hurt gaming demand by 5 percent to 6 percent.”

Meanwhile, Deutsche Bank AG analyst Karen Tang has written:

“We estimate that the smoking ban on [the] mass gaming floor since October 2014 had a 10-15 percent impact on mass gaming revenue. If [the] smoking ban is extended to VIP rooms in the second half of 2015/2016, the impact on VIP revenue may be similar.”

She believes that Galaxy Entertainment Group Ltd (OTCMKTS: GXYEY) and Wynn Macau Ltd (OTCMKTS: WYNMF; OTCMKTS: WYNMY) may be the gaming operators feeling the greatest impact because of their high exposure to VIP gaming. However, Macau’s Secretary for Social Affairs and Culture, Alexis Tam Chon Weng, has conceded it is unlikely the smoking ban will be approved by the city’s legislature before this summer.

So what can Macau casinos do to make up for lost revenues? It should be noted that luxury retail has long been another important sector for Macau and casino operators but the anti-corruption crackdown in mainland China is impacting revenues there as well. There are also new resorts opening between now and 2018, including the long-delayed Macao Studio City project, which are intended to diversify the local tourism economy away from gaming (something China’s central government has been pushing Macau to do).

However, another lengthy GGRAsia article explored the potential for nightclubs to pick up the slack for casino operators as the ones in Las Vegas can reportedly earn more per square meter than some of the casino gaming floors.

Thus far though, the Macau nightclub market has not been promising as Wynn Macau had introduced Tryst, one of the parent’s Las Vegas nightclub brands, in September 2006 only to close it seven months later to turn it into a private gaming area. In addition, MGM China Holdings Ltd (OTCMKTS: MCHVF; OTCMKTS: MCHVY) has already reduced the size of its Lion’s Bar on the casino floor and there are reports the bar may close because it was not “doing well enough.”

Moreover, GGRAsia was told by nightclub industry entrepreneur Jean-Albert Vergnaud:

“It’s not easy to grow revenue in the clubs scene unless you have competition… The artistic part is so important. If you just have one or two nightclubs [in the casino sector] which is the case now in Macau, it’s not easy. Competition pushes the owners of the clubs to develop their artistic and public relations to bring in the people. So I think once there are four or five major clubs, there will be major events on different nights, and more effort to get each club more profitable per square metre and per table.”

He added that despite the different tastes of Asian consumers compared to the typical Las Vegas tourist, there was nothing fundamentally wrong with the nightclub business model in Macau as it currently operates:

“The business model and margin for selling food and beverage in clubs in Macau is good. But in order to push up the minimum spend per table required of the patrons, you need the club to be packed…. Before, Las Vegas was an occasion to play [gamble]. Now it’s an occasion to go to clubs.”

To read the whole articles, Full smoking ban in Macau to hurt VIP revenue: analysts and Party lovers could get fresh chance amid Macau VIP woes, go to the website of GGRAsia. In addition, there is a full list of Macau ADRs and Macau casino stocks here.

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