Margin pressure seen rising as VIP gaming picks up

Macau’s casino operators are likely to facing increasing margin pressure in 2017 as overall costs rise and promotional pressures gain with the uptick in VIP gaming, Morgan Stanley wrote in a note.

The firm said staff costs rose by 5 percent in the second half of last year with the opening of the Wynn Palace and the Parisian. It sees a further 8 percent gain in wage costs this year as further openings pressure an already tight labor market.

“Promotional allowances rose to a record-high level in 4Q16; so did advertising and marketing expenses in 2H16, rising for the first time in two years,” it said. “Together with VIP revenue growing faster than mass, we see margin pressure in 2017.”

MGM China is expected to open its new Cotai resort in the second half of this year, while SJM Holding’s revamped Jai Alai is also scheduled to open soon.

Morgan Stanley estimates mass revenue needs to grow by 10 percent this year to maintain margins. It sees industry EBITDA growth of 3 to 5 percent quarter-on-quarter and 20 to 22 percent year-on-year. Its forecast for gross gambling revenue remains at growth of 9 percent.

“While our mass growth estimate of 11 percent is similar to that in the first two months, our VIP growth estimate of 6 percent may be conservative. If operating expense growth for 2017 is higher than mass growth, we may see margin erosion similar to that in 4Q16.”

Peninsula mass revenue continues to show negative growth, which bodes negatively for SJM.

The bank said it favors Galaxy Entertainment and Wynn Macau.