VIP pressure telling on Iao Kun

VIP pressure telling on Iao Kun

Thursday, September 22, 2016 Posted by Andy McCarron
Legal spat with Galaxy the latest sign of Macau trouble

One of the bellwethers for the Macau VIP market, the junket operator Iao Kun, has seen its losses in the second quarter extend to US$104.4m from $23.8m in the same period last year as the VIP slump continues in the Chinese gambling enclave.

The company said at the start of September it was to close three VIP rooms it was operating in Macau after a strategic review. Two of the closures came at Galaxy Entertainment properties and the operator has subsequently moved to suggest publicly that the closures were due to a breach of contract.

The spat will do nothing to deflect attention to the parlous state of the VIP market in Macau. The figures from Iao Kun show rolling chip turnover falling to $900m from $1.7bn in the year previous quarter. Revenue fell in step, down 52% to $10.6m in the three months to June.

The company said the decline was largely accounted for by the decline in IP baccarat play in Macau as the anti-corruption campaign being waged by the Chinese government continues to impact the high-roller segment. The company was also hurt by one-off impairments of $97.3m related to the VIP rooms closures.

In a sign of the tensions in Macau, Galaxy Entertainment issued a statement last week that suggested it had initiated the decision to close the Iao Kun rooms due to breach of contract on the part of the latter.

Iao Kun continued to suggest it was behind the decision in the comments accompanying the second quarter results. "As we expect that the VIP market in Macau will continue to be challenging for the foreseeable future, we commenced a strategic review of our operations to reduce expenses and continue to preserve our capital. As a result of the review, we recently closed three of our VIP gaming rooms in Macau," said chairman Lam Man Pou.

The pessimism over the prospects for Macau was echoed by analysts at Morgan Stanley who said in note issued on Thursday that the prospects for mass market gaming to fill the revenue void left behind by the VIP decline were slim. The team said that the absence of the infrastructure upgrades would hinder mass transit and hence mean the uplift in mass market revenues would be constrained in 2017 to the 10% mark. In comparison, the analysts believe the VIP market will contract by a further 16% next year.

The team pointed out that mass revenues growth clocked in 3% in the second quarter, helped by the increase in new rooms from the opening of the Wynn Palace and Sands China’s new Parisian property. However, there was an 11% decline in revenue per hotel guest. “We are cautious on spending per capita growth because Wynn Palace's premium mass business is ramping up more slowly than expected, while stronger ramp at Parisian (focus on grind mass market) will dilute overall spending per capita,” the M Stanley team wrote. “We see further risk of new Cotai casinos cannibalizing Peninsula casinos instead of increasing the overall market.”

Totally Gaming says: If the spat between Galaxy and Iao Kun is anything to go by the pressure is undoubtedly telling in Macau, particularly in the VIP segment. Hopes obviously lie with mass market gaming, and this is certainly the direction that the Chinese authorities are heading. However, as the Morgan Stanley note makes clear, improvements in the mass transit of Chinese visitors from the mainland and from Hong Kong will be needed before a true recovery will be seen.

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