The Star Entertainment Group released its half year financial results and they make pitiful reading. Every measurable indicator on the statutory report fell by at least 8.4%. Net profit after tax was worst hit with a 48.5% decrease compare the same reporting period last year. Again, Star blamed a poor VIP win rate.
Australian casinos report two sets of financial figures. Statutory and Normalised. The former results disclose revenue and expense at actual win rates and include significant items. Normalised figures reflect the underlying performance of the business as they remove the inherent win rate volatility of the International VIP rebate business. The normalised figures assume a VIP win rate of 1.35%.
The Star statutory financials are, frankly, awful. Revenue from ordinary activities slumped 8.4% to $1,053.7 million. This resulted in Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) plummeting 26.5% to $243.4 million.
Worse is yet to come when you look at total net profit after tax. This weighed in at $76.5 million, a massive reduction of 48.5%.
Everything looks rosy, however, when you look at the normalised financial figures for Star. Revenue increased 1.9%, EBITDA improved 3.5% and net profit after tax improved 2.1% to $126.4 million.
Huge Reduction in VIP Win rate Damages Star Financials
Why is there such a huge disparity between the two sets of Star financial figures? A lack of VIP win rate.
Australian casinos assume they win 1.35% of VIP wagers. This figure doesn’t seem much but these VIP wager astronomical sums of money. Star reported turnover from foreign VIPs was $42.4 billion for the previous full year results. This equated to profits of $572.4 million.
Star Chairman John O’Neill revealed the VIP win rate was a mere 0.76%, almost a full point less than expected. O’Neill said this is the worst VIP win rate since 2008, more than a decade ago.
It is only six months since Star blamed a lack of VIP win rate for a downturn in profits. Those figures were skewed by a VIP win rate of 1.16%.
Why Is VIP Win Rate Falling?
It’s not only Star that has suffered a reduction in VIP win rate, other Aussie casinos are feeling the pinch. Ongoing political tensions between the United States and China are affecting Chinese VIPs. The uncertainty of possible trade sanctions are causing these VIPs to hold back spending.
The well-heeled Chinese gamblers are also astute business persons who stand to lose huge sums of money if trade sanctions are put in place. They are filthy rich but they don’t want to blow huge amounts if their business interests are about to suffer.
These VIPs are still visiting Australian casinos, they’re just spending far less.
Coronavirus Will Exacerbate The Problem
Casinos’ VIP win rates will drop again because of the ongoing coronavirus epidemic. Sixty-thousand confirmed cases and more than 1,350 deaths were the figures reported seven days ago. These have increase to 77,200 cases and 2,250 confirmed deaths.
Macau’s government ordered a complete lockdown of casinos in the region to help prevent the virus spreading. Chinese residents are banned from unnecessary travel, which is already affecting Australian casinos’ revenues.
The Queensland Tourism Industry Council has run simulations and the potential lost revenue is huge. Its Chief Executive Daniel Gschwind expressed his fears for long term repercussions for the gaming sector.
“I think this is the biggest crisis we have faced in a decade,” said Gschwind. “The loss of business around Chinese New Year is irrevocable. It will come back, but when? Many businesses have been pushed to the absolute brink and possibly beyond.”
Gschwind estimates the coronavirus is costing the casino industry $1 billion per month. This doesn’t take into account the fact many Chinese VIPs will continue not travelling abroad. Worse could be to come for The Star and others.