Profits up in smoke

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The approval of the newly proposed smoking bill could lead to a 10 per cent decrease in VIP and premium mass gaming revenues and a 5 per cent decrease in overall gaming revenues in 2019, the expected first year of full enforcement, according to analysts at JP Morgan.
On Tuesday, the second standing committee of the Legislative Assembly (AL) announced that it agrees with the government’s proposed changes that gaming operators will have until January 1, 2019 to install new smoking lounges or update their current ones to meet new standards.
With smoking currently allowed at the gaming tables in VIP rooms and premium mass rooms, a possible approval of the smoking bill would mandate gaming operators install smoking lounges in these areas by the deadline given.
For JP Morgan analysts, the passing of the bill would impact gross gaming revenues from current smoking tables in both VIP rooms and premium mass rooms by up to 10 per cent once the bill is fully implemented from the beginning of 2019.
The report estimates VIP revenues currently represent around 45 per cent of gross gaming revenues and almost 20 per cent of gaming EBITDA in the city’s gaming market, while revenues from premium mass rooms where smoking is allowed comprise 15 per cent and 10 per cent of mass market gross gaming revenues and EBITDA, respectively.
The impact on overall gaming revenues and EBITDA in 2019 was estimated at a 5 per cent and 3 per cent possible reduction respectively, considered by JP Morgan analysts as ‘not nothing, but manageable.’

Melco most exposed
When analysed by gaming operator, JP Morgan analysts believe Melco Crown Entertainment Ltd. could suffer the largest impact, since 35 per cent of its 2019 EBITDA was estimated to derive from premium mass smoking tables, especially in its integrated resort City of Dreams.
Galaxy Entertainment Group (GEG) and local gaming operator Sociedade de Jogos de Macau, S.A. (SJM) would also suffer a considerable impact with 30 per cent and 20 per cent of their estimated 2019 EBITDA coming from tables where smoking is allowed.
Gaming operators Sands China Ltd. (Sands China), Wynn Resorts (Macau) S.A. and MGM China Holdings Ltd. were considered to be ‘relatively immune’ in terms of a smoking bill impact on revenues, since only 10 per cent of their estimated revenues for 2019 would derive from smoking tables.

Silver lining
Despite the possible impact of the smoking bill, JP Morgan analysts consider that ‘it still remains to be seen’ if the law will actually pass voting in the AL, with the serious possibility of the bill being ‘scrapped’ if it is not approved before the legislative term finishes on August 15.
If the bill passes, analysts consider it still a ‘good compromise’ and should be seen as ‘positive’ considering it is ‘far more lenient’ than the law initially proposed in 2015, which considered a full smoking ban in all gaming areas without even allowing smoking lounges.
Since the date granted for full implementation was ‘meaningfully later’ than what the market and analysts initially expected – at the end of this year or beginning of 2018 – the JP Morgan analysts also believe there will be enough time for the market to ‘study the potential impact and manage expectations accordingly.’