During the forthcoming review of casino concessions, the government will likely push for a new tax structure whereby operators will be charged more via corporate tax whilst seeing a reduction in gaming tax, currently at 39 per cent. This will give Macau the opportunity to keep the current level of money coming from casinos as the market matures – the ‘new normal’ – whilst securing a tax structure less dependent upon the ups and downs of revenues.
According to Union Gaming (UG), this is probably one of the major changes that Macau will impose upon the Big Six gaming operators during the discussions. These discussions, scheduled to happen this year and next, are expected to be smooth as the local government and Beijing are not keen to change the nature of the concessions that otherwise could destabilise the Macanese economy. ‘We believe the greatest risk is that the Macau Government will look to keep more cash closer to home, possibly implementing a higher corporate tax rate and lowering the gaming tax rate’, wrote the brokerage in a note to clients.
With no details from authorities, Union Gaming says that another possibility is the reduction of the concession from the current 20 years to only ten. However, the brokerage underlines that the discussions will focus on maintaining the current level of casino operations – mainly gaming revenue – and some commentaries from Macau and Beijing to the operators in order to centre their development on developing the social welfare and infrastructure of Macau.
Labour pains
But if the extension of the casino licences is a hot topic for the long-term, the labour market is the main issue this year, says Union Gaming. With the economy booming in the last few years, fuelled by record gaming revenues, casino workers have seen ‘considerable wage growth’. With the reality shock of last year (revenues dropped by 2 per cent ) and the expectations of a further decline this year of 5 per cent, wage growth will suffer additional pressure, UG noted: ‘To the extent that this creates resentment within the labour force, this remains a real risk, especially given other social and transportation issues that weigh on life in Macau’.
A record drop in revenues like the one Macau suffered last year (seven straight months of declines likely to last five more until the Summer), should theoretically result in a flow of dismissals in any industry. However, Union Gaming says the scenario is ‘highly unlikely’ and believes that none of the six concessionaires will follow this path. The solution is probably to soften future hiring. “Even if performance continues to decline, we believe that the political risk of cutting Macanese jobs is far too great. However, instead of headcount reductions, we expect operators to minimise hiring in the current environment, and they could reduce headcount needs for their upcoming projects”. The expectations of Macau citizens regarding future wage growth will be one of the main challenges for the executive here.
A year of two tales
Union Gaming estimates gaming revenues will decline 4 to 5 per cent in 2015, putting the industry in the red for its second straight year. In terms of performance, the year will be divided in two. In the first half, revenues are expected to go down between 15 to 20 per cent, followed by a recovery into positive territory with a 5 to 10 per cent growth. Describing the current Macau market as ‘badly bruised but still functioning’, Union Gaming says the city’s mass market remains intact as shown by the 7 per cent increase in visitation last year, ‘providing the engine for both near and long-term growth and stability in Macau’.
‘Although we look to China for economic improvements, especially in the lending and housing markets, we see Macau specifically maturing as a broader and more palatable investment, one with less focus on the controversial VIP sector and one that is still seeing its regulations and controls continue to evolve, not unlike other large global gaming markets.’
The shift from VIP to mass market means that the outlook for the junket business ‘remains bleak’. Union Gaming says it doesn’t believe in the end of the VIP segment in Macau but ‘it’s clear that after this reset, it will emerge as a shadow of its former self. We don’t think it will go away entirely, as there is real service there.’
