Inside Asian Gaming

January 2011 | INSIDE ASIAN GAMING 23 another 100 bps), the surprise to investor expectations would be positive,” says the report. Set against potential upside risk on the VIP trade is the possibility that growth of the mass market—with its higher margins—could make a proportionately greater contribution to the bottom line. “We expect Macau Gross Gaming Revenue (GGR) to grow at 15% YoY in our base case for 2011 and we think risk is on the upside. We expect Mass Revenue is going to increase by 21% YoY while VIP Revenue is going to increase by 12% YoY. We see upside risk from VIP revenue growth while we see limited downside risk for the mass revenue growth. We make our projection through bottom-up approach from respective projections of the operators.” Table games in general and baccarat in particular will undoubtedly remain the dominant gaming action in Macau during 2011, as Morgan Stanley suggests. Until now, the main battleground for the six concessionaires and sub-concessionaires in Macau has been market share of the VIP baccarat trade. Baccarat hold volatility (aka house ‘luck’) affects both the high roller and mass-market businesses and thus the profitability of both segments. But the mass segment clearly offers greater underlying profitability to operators (typically 35% gross margin on the mass versus typically 7% or even as little as 3% on the VIP because of fierce competition on rolling chip commissions and win-rate sharing). Important factors in the greater profitability of the mass segment are its lower marketing and player incentive costs because the casinos don’t need to use junkets to bring players to the table. The performance of Sands China in the third quarter of 2010—when its EBITDA margin was boosted by a combination of the company continuing aggressively to control costs and it capturing a large percentage of the mass market (23% in November 2010) despite a more modest showing inVIP market share (12% in November 2010)—shows the inherent value of the mass if significant volume can be built. “[Sands China] EBITDA margin improved gradually from 17.6% in 1Q09 to 23.6% in 3Q10. This is helped by rising mass win rate and operating leverage. For example, its staff costs as a percentage of total revenue has decreased by 650 basis points since 2007,” says Morgan Stanley. Market Outlook Macau VIP Roll YoY% Vs China Overnight SHIBOR -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 SHBIOR % -40% -20% 0% 20% 40% 60% 80% 100% YoY % Inverted Overnight SHBIOR (LHS) VIP Roll YoY% - 9mths backward (RHS) Correlation: 82% Source: CEIC, Industry Data, Morgan Stanley Research Mass Revenue Share by Operators (Nov 2010) SJM, 41% Sands China, 25% Galaxy, 5% MPEL, 9% Wynn Macau, 11% MGM, 9% Source: Industry Data, Morgan Stanley Research VIP Roll Share by Operators (Nov 2010) Galaxy, 14% SJM, 33% MGM, 11% MPEL, 14% (Totals 101% due to rounding) Wynn Macau, 17% Sands China, 12% Source: Industry Data, Morgan Stanley Research Sands China: Staff Cost as % of Revenue Falling - 50 100 150 200 250 300 350 400 2007 1H08 2H08 1H09 2H09 1H10 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Employee benefit expenses Staff cost as % of Net Revenue US$ mn Source: Company data, Morgan Stanley Research