Macau Smoking Ban Takes Hold

Smoking is now prohibited in the public gaming areas of the largest casino market in the world under rules that took effect last week in a much stricter manner than expected. Analysts now believe the impact on revenue and operating profit will be more severe well.

New rules went into effect on Macau’s public casino floors last week that relegate smokers to airport-style smoking rooms, adding to the woes of a market mired in a revenue slump.

Twenty-eight of the Chinese gambling hub’s 35 casinos and five machine gaming parlors have submitted plans to install some 62 of the rooms, but only 12 had done so by the time the ban became official last Monday, meaning the other 16 must operate totally smoke-free until theirs are up and running and approved by the government’s Health Bureau.

“Other casinos have not yet completed all the procedures,” the bureau said, adding that some have not completed construction of the rooms and that others are awaiting inspection and approval.

“There will be some teething problems,” said Aaron Fischer, a Hong Kong-based analyst with CLSA Asia-Pacific Markets.

VIP rooms are exempt from the ban, which surprised analysts and observers by not allowing casinos to sequester their higher-limit cash tables within enclosed smoking areas, which had been expected. Some had even built such enclosures, according to reports—“an effort in futility,” said analyst Grant Govertsen of Union Gaming Research Macau.

Cameron McKnight and Rich Cummings, analysts at Wells Fargo Securities, said pressure from labor groups could be the reason behind the change in interpretation.

“Given Hong Kong’s situation, we feel the government is sensitive to protests, and is possibly encouraging operators to follow the spirit, rather than the letter, of the smoking regulations,” they wrote in a client note issued last week.

“While previously we had expected just a low-to-mid-single-digit percentage impact to overall gross gaming revenue from the smoking ban (if premium-mass areas can still smoke), we would now expect a higher mid-to-high-single-digit impact to overall GGR if smoking is not allowed in all premium mass-areas as well,” said Barclays.

Morgan Stanley said EBITDA market-wide could fall by more than $700 million over the next several months, which looks worse now than it would have earlier this year, but revenue growth has fallen year on year every month since June, mostly the result of a substantial drop in VIP play tied to slower economic growth in China and the central government’s aggressive crackdown on graft and corruption.

Visa restrictions and a crackdown on the use of UnionPay debit cards to transfer money from China also have been deterrents.

In July, the government reduced the maximum number of days Chinese passport holders with transit visas can stay in the city to five from seven, in an attempt to prevent them from abusing the system. UnionPay transactions are also being scrutinized after it was reported earlier this year that swipe devices were being smuggled en masse from the mainland to Macau to enable gamblers to evade currency controls and withdraw more cash than allowed under China’s daily limit of 20,000 yuan per day (US$3,200) for individuals taking cash out of the country. 

To date, mass-market growth has decreased year on year from 30 percent in the first quarter to around 15 percent in the third and total revenue was down 11.7 percent in September to the lowest level in five years.

President Xi Jinping’s planned visit in December in celebration of the 15th anniversary of Macau’s return to China is not expected to help.

“High-end demand, both VIP and premium mass, could remain weak for the rest of the year,” Anthony Wong, a Hong Kong-based analyst at UBS, said.

Morgan Stanley has cut its revenue growth estimates to just 1 percent this year and 0 percent in 2015, before rebounding 13 percent in 2016.

Macau saw US$45 billion in gaming revenue last year, the most of any casino market in the world.