The next earning season will be a tough one for casino operators as companies will probably show investors a performance miles away from previous quarters. Even if historically fourth quarter results (released around March and April) are overshadowed by the year figures, this time the market will assuredly take a closer look, in particular at the impact of 2014’s second half downturn with its diminishing revenues and increasing staff costs.
According to a report released yesterday by Credit Suisse, the current gaming crisis here has already cost billions in profits and revenues. In the fourth quarter, the six Macau operators made a total of HK$15.6 billion in profits, according to the bank’s estimations. That’s a 22 per cent drop year-on-year and a 12 per cent decline compared to the third quarter. In the last three months of last year casinos in Macau ‘lost’ HK$2 billion in profits compared to the previous quarter.
On a year-on-year basis, Wynn Macau and Melco Crown are set to take the biggest hit. Credit Suisse estimates profits of the former to go down 34 per cent and the latter by 31 per cent. On the other hand, Sands Macau will register the lowest decline, with earnings down 10 per cent.
Margins pressured
This performance is linked to a record decrease in revenues and upward pressure in costs for casinos. Gaming revenues went down in the fourth quarter 25 per cent from a year ago, almost four times more than in the third quarter (7 per cent drop). In sequential terms, revenues diminished 9 per cent.
‘Overall, we estimate the industry EBITDA to fall by 12% Q-o-Q or -22% Y-o-Y in 4Q14 as a result of the less favourable revenue mix and operating deleverage on sharp revenue deceleration’, wrote Credit Suisse.
The industry uses as benchmark for profits the EBITDA or earnings minus interest, taxes, depreciation, amortization. EBITDA is known as the operational profit of a company.
The Swiss bank says that in terms of revenue performance, Melco Crown is likely to emerge the winner of the quarter, while Wynn Macau will register more losses. According to Credit Suisse, Melco Crown will be the only operator in Macau to register growth in revenues (up 3 per cent) on a quarterly basis. ‘More favourable luck at City of Dreams (4Q14E: 3.03%, versus 3Q14: 2.70%); ramping up of VIP business (VIP volume +4% Q-o-Q in 4Q, versus industry’s -8%) and continuous focus on improving customer yield’, are the main reasons.
With revenues expected to remain weak in the upcoming months and casino operators still struggling with more costs on staff and the new properties being built, profit margins will continue to be under pressure at least until mid-2015. ‘In our view, operators only started revisiting their cost structure aggressively towards end-2014 and the benefit of better cost control would take time to flow through into margin’.
February record
In a note to clients, Wells Fargo says it expects gaming revenues to drop a record 35 per cent in February due to the comparisons with last year, one of the best months ever for the industry here. The Chinese New Year will generate a jump in February revenues in monthly terms but not on a year-on-basis. The US bank estimates revenues will go up 12 per cent from January based on past seasonal trends. For this month, Wells Fargo is predicting a decline of 17 to 18 per cent in gaming revenues. January daily revenues today stand at MOP740 million, one per cent less compared to December.
