Macau gaming revenue fell 6.1 percent in August versus a year ago, the third straight month of year-on-year declines, as high rollers from China continue to avoid the territory and mass-market growth shows signs of slowing.
In percentage terms, August’s decline was greater than the 3.6 percent fall recorded in July or the 3.7 percent decline in June, and August wasn’t competing with the World Cup for gamblers’ attentions. On the plus side, August’s total was MOP460 million (US$57.6 million) greater than July’s.
Year to date, gaming revenue stands at MOP250.4 billion ($31.4 billion), up 8.1 percent over the same period last year, thanks mainly to the 40 percent gain in February during the traditional Lunar New Year surge.
The market softness is being blamed on a number of causes, most notably the Chinese government’s ongoing crackdown on corruption, which has hit the VIP segment particularly. A slowing housing market on the mainland is also taking a toll, and credit is tightening, which is squeezing junket liquidity. While tougher visa rules for outbound mainlanders are cutting down on the amount of time they can spend in Macau.
Credit Suisse said the corruption crackdown, in conjunction with the new limitations imposed on the issuance of travel visas, had created “increasing inconvenience” for both VIPs and higher-limit cash players, the so-called “premium-mass” gamblers, “lowering their incentive to visit Macau.”
Hong Kong-based Deutsche Bank analyst Karen Tang echoed these sentiments, saying the VIP sector had undergone a year-on-year decline in the “mid-teens” in August. She added that junket operators had witnessed a noticeable drop in VIP players from neighboring Guangdong province following recent anti-graft arrests in Guangdong and Shanxi.
Investment brokerage Union Gaming Research Macau said it is hopeful of a recovery in early 2015, “which would dovetail nicely with the opening of Galaxy Macau Phase 2,” and added the upcoming October Golden Week holiday could exhibit “a strong VIP showing”.
The revenue declines come at a time when an acute labor shortage city-wide and rising worker discontent is driving costs upward and crimping margins.
Croupiers and other front-line gaming floor staff have taken to the streets in a series of protests targeting several operators. Workers are demanding pay increases and improvements in other benefits and reforms in promotions policies they consider arbitrary and unfair.
A threatened job action by dealers at SJM Holdings’ Grand Lisboa was called off at the last moment, but about 1,000 workers turned up late for shifts last weekend and refused to work overtime as part of an ongoing protest against wages and working conditions.
The industry will need to fill thousands of positions when the six new resorts under construction on Cotai start coming on line next year. But with unemployment in the city running at around 1.7 percent, and croupier positions restricted to Macau permanent residents as a matter of government policy, a viable solution has yet to be proposed, and the costs of retaining existing workers and recruiting new ones are certain to balloon.
Investment bank Morgan Stanley forecasts that labor demand for the will rise by 38 percent between 2014 and 2017. Barclays Bank said in a note last month the casinos will need about 55,500 workers from 2015 onwards, between 14,000 and 17,000 of these for dealer positions, based on the assumption that the new casinos receive about 400 table games each.
Full-time employees in Macau’s gaming industry totaled 56,700 people at the end of the second quarter, accounting for 14.5 percent of the city’s workforce. Dealers accounted for 45.4 percent of all employees in the industry as of June 30, according to government data. As of that date, their average monthly earnings had increased by 4.8 percent year on year to MOP17,530 (US$2,196).
A number of gaming analysts said the increase in staff costs seen this year was earlier than investors had expected.
Second quarter earnings season for Macau operators was “disappointing,” Tang wrote in a report last month. “The key reason was higher staff retention costs.” Pay raises, bonuses and more recently announced incentives will accelerate labor cost inflation from 5 percent to 8 percent per year to 10 percent to 15 percent through 2017 and would likely have a 50-70 basis point impact on margins. “We expect margin expansion from favorable mix shift from VIP to mass will be diluted,” she said.
Christopher Jones of U.S.-based Telsey Advisory Group said labor cost increases are expected “in the mid to high teens,” though it may vary among operators.
Kenneth Fong of Credit Suisse in Hong Kong said in a recent note that the impact on margins and earnings might not be as severe as the market fears. He said staff retention programs launched in the first half of 2014 already cover the period through 2017. He added some casino operators were freezing recruitment as revenue growth slowed, and suggested that “moderating revenue growth should prompt operators to aggressively revisit their cost structures, benefiting margins”.
“Even if we were to conservatively assume no revenue growth but a 10 percent staff cost increase in 2015, the impact would be likely to be around 3 percent to 4 percent of earnings,” he wrote.
But Jones said, “Separating out planned and unplanned labor increases is tough. We suspect that higher labor costs could cost the companies 1 percent to 2 percent in margin, which is very significant.”
