Macau Casinos Going Through a Rough Patch

The reports for the second quarter of this financial year are not very optimistic for the world’s largest gambling destination.

When Macau reported June’s year-on-year gaming revenue decline, investors said there was nothing to worry about. In fact, they said this was the bottom and predicted that the industry would make a fast recovery. But their predictions may prove premature, as the latest figures are not at all optimistic.

The good news is that year on year gaming revenue was up 5.5% for the second quarter, reaching a total of MOP 90.9 billion. That’s about $11.4 billion. What’s more, revenue for the first half of the financial year increased by 13%. This would normally be a good results, if we weren’t talking about Macau, where companies are used to much better results.

But according to the latest gambling news, all promising announcements end here as casino revenue for the second quarter dropped by 11% compared to the first financial period of the year. This phenomenon of sequential quarterly profit drop hasn’t happened since 2012. So let’s take a more detailed look at what this could mean for the industry.

The casino slow-down

Online casinos that accept players from Macau:

• Luxury Casino
• Royal Panda
• Casino Action
• Mr. Green Casino
• Dublinet

Las Vegas Sands and Wynn Resorts both rely on Macau for a significant part of their monthly profits, while operations in America have slowed down considerably. But both of these casino giants have fallen below expectations lately.

Wynn Macau has recently released its financial report for the second quarter and earnings before interest, taxes, depreciation, and amortization (EBITDA) have only increased 6% to $307 million, compared to the 17% predicted by the Union Gaming Research.

Of course, there is no need to panic yet. Macau’s future looks pretty solid, but investors are starting to realize that this wasn’t just a minor and temporary setback, but that momentum has slowed and there are plenty of bumps in the road ahead.

VIP visitors flee to other destinations

Industry experts blame June’s revenue decline on a drop in the number of VIP visitors. According to analyst Praveen Choudhary, who works for Morgan Stanley Asia, rival destinations are doing much better in the VIP segment.

Under Macau gambling laws, the taxes on gaming revenue go as high as 39%, while other countries have lower taxes, which means that casinos can afford to pay higher commissions to junket operators.

Local casino developers and government officials have an agreement to limit commissions on VIP play to 1.25%, while rates in other gambling areas range from 1.4% in Singapore to as much as 2% in Cambodia.

Players from Northern China can get to South Korea faster and easier. Singapore also reported an increase in the number of VIP players and showed faster growth compared to Macau. The Manila Solaire, for example, managed to double its VIP sales in the first quarter from the previous three months, reaching $2.6 billion. For Wynn Macau, that’s the equivalent of an average weekend, but Macau seems to be slowing down.

Analysts say the decline in VIP attendance could be caused by China’s anti-corruption campaign, which makes high-rollers and famous people more reluctant to choosing Macau as their top gambling destination.

What brings Macau profits down

Until recently, the number of VIP customers was not such a big issue because mass market play was much more profitable. For the past three year, this sector has grown more than 20%, with an increase of over 30% just over the past year. But during the second quarter of this financial year, growth slowed down from 39% to 32% and visitors are spending less than they used to.

It used to be that Macau always had a shiny new casino to show off with, but now tourists are less enthusiastic about it. Visitors from mainland China are starting to look for new and exciting places. Furthermore, authorities are planning to introduce a smoking ban on main gaming floors later in October and this could slow things down even more.

Labor costs have also increased, as employees protested and operators increased their paychecks and benefits, in order to keep them satisfied.

So what will the future bring? While Macau is still the world’s most visited gambling destination, it’s becoming clear that the kingdom is shaking. And with new areas opening up to casino investors, its booming business is certainly threatened.