Inside Asian Gaming

November 2013 | INSIDE ASIAN GAMING 23 lower-margin VIP sector, and the result is that local casinos—and particularly the more mass-market-focused ones—are seeing profitability increase by a greater degree than the headline revenue number. Macau’s most mass-market focused operator, Sands China, for example, reported a 42.7% increase in Q3 revenue to $2.3 billion and a 62.8% jump in adjusted EBITDA to $785 million. The increasing contribution of the mass market is also improving the earnings profile of Macau operators, according to J.P. Morgan Leisure and Gaming analyst Kenneth Fong. In a recent report, Mr Fong highlighted: “From an earnings quality perspective, the cash-driven mass market revenue is also more sustainable and less cyclical than the receivables- driven VIP segment. One of the reasons why investors refrain from assigning a higher valuation to the Macau gaming sector is its reliance on credit-driven VIP revenue, whose growth is hard to predict. The increased contribution from mass market growth should give investors improved earnings visibility.” If the mass market continues growing at 25% and VIP at a slower 5%, “The revenue mix would become 50/50 between VIP and mass as soon as 2016,”according to Mr Fong. Furthermore, “Due to the profit margin difference between the two segments (VIP 10% vs. mass 35-40%), the VIP segment now contributes only 42% of EBITDA, despite contributing 70% of the top line. In our scenario discussed above, the EBITDA contribution from VIP could decline to only 25% in 2016.” J.P. Morgan’s latest forecast calls for 16% growth in Macau gaming revenue this year, which translates to headline gaming revenue of MOP354 billion ($44.3 billion). In a recent report, Mr Fong adds: “Looking ahead, we expect 2014 and 2015 gross gaming revenue to grow by 16% (up from 13%) and 17%, respectively. Our growth estimates are at the high end of the Street’s assumptions, as we have more optimistic VIP gaming revenue forecasts. Market Shares Following the liberalization of Macau’s casino industry in 2002, allowing the entry of IN FOCUS Projected Macau Gaming Revenue Mix Shift * * Assuming 30% mass growth and 5% VIP growth over 2012-2016 Source: Company data, J.P. Morgan estimates VIP % Mass % 2012 2013 2014 2015 2016 90% 80% 70% 60% 50% 0% 100% 40% 30% 20% 10% Gross Gaming Revenue % 31% 34% 39% 43% 47% 69% 66% 61% 57% 53% Projected Macau Gaming EBITDA Shift * VIP % Mass % 2012 2013 2014 2015 2016 90% 80% 70% 60% 50% 0% 100% 40% 30% 20% 10% EBITDA % 58% 63% 67% 70% 74% 42% 37% 33% 30% 26%