US$1.5 billion in revenues up in smoke until mid-2015

Some say it’s an unknown, unpredictable. Others admit they’re sailing in uncharted waters, while a few assume already a not so small impact. The smoking ban on mass gaming floors in Macau already started but investors have yet to decide on how to incorporate it in their estimations. 
The challenge is big. The correlation between smoking and gambling is much more psychological and harder to predict than analysing the effects of less credit available to junkets, for example. First, the link with smoke changes from one gambler to another – some can play without smoking, other cannot – while if there’s no credit or money available in the market, it’s useless to sit at a baccarat table. 
With the first day over, the market is shifting to a wait and see situation regarding the smoking ban. Some, however, are advancing figures and, for now, the outlook is bleak. 
According to Macau Business calculations based on a report by Morgan Stanley, the Macau gaming industry could see its profits (EBITDA) slashed by US$787 million over the next nine months (from fourth quarter of 2014 to the second quarter of 2015) through the smoking ban alone. 
The casino industry regularly uses the operational profit concept (commonly known as EBITDA or earnings before interest, taxes, depreciation and appreciation) rather than the net profit one. 

Billions lost 
Smoke prohibition could lead players to spend less time and money on the tables and some may not be able to play at all. US bank figures also reveal that the Big Six – SJM, Wynn, Sands, MGM, Galaxy and Melco Crown – are set to lose more than US$1.5 billion in revenues here from mass gamblers over the next three quarters.  
Morgan Stanley expects the smoking ban to drain revenues from mass floors to a point where the segment will have a flat growth this quarter and a 5 percent decline in the first two quarters of next year (all on a year-on-year basis). This performance compares to a 13 percent increase in mass revenues in the third quarter of this year.  
With these predictions in mind for the mass segment, Macau gaming operators are likely to lose US$212 million in profits and US$409 million in revenues between October and December. 
The losses will be even bigger at the beginning of next year with Chinese New Year prompting the Big Six to cut another US$305 million in profits and more than half a billion dollars in revenues in the first quarter due to the smoking ban. 
Following a drop in gaming revenues of 11.7 percent year-on-year in September, the smoking ban will put the industry into ‘fresh lows’ this month, warns Morgan Stanley. Consensus on the street is a 15% decrease.  The profits for the casino industry here in 2015 – the first full year of the smoking ban – have also been revised down by 6 percent by the US bank.  

What’s the truth?
But this outlook is not shared by all investors, at least for now. In a note to clients, Union Gaming said the ‘impact of the broader smoking ban should be minimal, after the initial confusion and construction disruption’. 
The brokerage justifies this position with the theory that most gamblers will not play for more than 30 to 40 minutes at any single table and while inbetween they will go for a smoke. But Union Gaming admits that another school of thought says that gambling and smoking go ‘very much hand-in-hand’ with players needing a cigarette while betting to relieve stress. Assuming being in ‘uncharted waters’ on this subject, Union Gaming decided to work ‘for the time being’ on the conservative assumption that there could be further downside risks to estimations that are ‘currently not reflected in consensus’.  
Also, without making any detailed impact on the smoking ban alone, Wells Fargo considered that the measure is likely to have a negative impact on the industry as the ‘new guidelines could increase the reach of the smoking ban’.  

Worse than junkets or protesters 
The losses in revenues and profits caused by the smoking ban are likely to be much bigger than the effect of the current credit shortage suffered by junkets or the cost increases on staff this year due to demands from casino workers for better wages and working conditions.   
Take this quarter as an example, using Morgan Stanley estimations. The smoking ban will ‘cost’ casinos here a total of US$212 million in profits, three times more than the profits lost because of non-recovery of junkets’ liquidity (US$77 million). This year, Macau operators are spending around an extra US$15 million each quarter on bonuses and additional wages for workers.  
While operators and investors wait to see the real impact of the smoking ban, the industry already knows this is only one more headwind facing Macau this year.  Hong Kong protests are already affecting mainland visitors here, VIP clients continue to go gambling in other destinations in order to fly under the anti-corruption crackdown radar, and China’s economic recovery is still soft, meaning less credit available for gambling.