Whilst Macau’s operators have employed cost mitigation and labor shifts, any further cost cutting will prove challenging given new supply and flattish revenue, said Deutsche Bank in a research report.
According to the brokerage, the key to the Macau market will shift to how new supply is absorbed from an EBITDA perspective.
“At present, we see further cost mitigation efforts as more challenging and with new supply and flattish revenue, we expect the recent year-on-year margin improvements to inflect negative again in the 2H16.”
Las Vegas Sands’ cost cutting has been most aggressive to date, extracting roughly $250 million of annualized costs from Macau operations in 2015, while Wynn did “fairly little” in order to continue the service strategy it has been known for.
This means Wynn has more flexibility in cost mitigation, “despite greater overall cost base escalation with the Palace opening,” says the brokerage. “We believe there is more room to right size the non-gaming related cost base.”
In terms of staff costs, 2015 saw Wynn increase costs by 8 percent year on year, while staff cost increases at MGM and Las Vegas Sands were more subdued, with just 1 percent growth year on year.
The three operators plan to shift labor to their respective new openings, with Wynn “alleviating the most pressure as it shifts $100 million of labor to Cotai (25 percent of 2015 staff costs).
Driving revenue will be the key here, says the brokerage, given that cost reductions post Cotai opening will become more challenging.