The Times Are Getting Tougher – A Macau Update

Macau generates more gaming revenue than any jurisdiction in the world. Because of its revenue, everything related to gaming that happens in Macau is news. It is news, but little that happens in Macau is applicable in other places. The trends in Macau stay in Macau, except when they impact gaming stocks. When revenues go down at Wynn, Sands, MGM and Melco, gaming stock prices are apt to go down; it isn’t fair and it isn’t logical, but it happens. And maybe that is reason enough to review the situation in Macau at least once a month.

The gaming revenue in Macau in May was down thirty-seven percent. That is a lot, but it is the smallest decline of any month this year. Macau is closing in on twelve months of consecutive revenue declines. The decline is due, as most things in Macau are, to events in China. The Chinese central government is in the midst of a crackdown on corruption within the communist party, the government and society in general. The crackdown is ongoing and up to this point it has been unrelenting. Some very high profile officials have been prosecuted and severely punished; that is scary for many people in China. Most of the once high flying Chinese gamblers are staying away, quaking with fear. That has hit Macau hard.

China sentenced its powerful former domestic security chief Zhou Yongkang to life in jail yesterday, after he was found guilty at a secret trial of bribery, leaking state secrets and abuse of power in China’s most sensational graft scandal in 70 years. Ben Blanchard and Benjamin Kang Lim, Business Day, 6-12-15

No one is suggesting that Zhou was spending his money in Macau, but many of the targets of China’s anti-corruption campaign were. The backbone of Macau’s gaming revenue has always been VIP play. The VIP gamblers travel to Macau compliments of junket operators. The junketeers court them because they are willing and capable of making very large wagers. The entire industry was built on those VIPs; unfortunately for the casinos and junketeers, many of them have either been caught in the government’s campaign or frightened away by it. The VIP business has dropped drastically in the last year. Many junket operators deserted Macau in favor of Korea, the Philippines and Cambodia. Others have folded completely, gone into real estate or retail businesses on mainland China or other parts of Asia. Some are still in business, but cutting operations back significantly. They are waiting for an unlikely upswing as the central government is expected to tighten even more travel restrictions to Macau.

With no sign of any let-up in the VIP gaming crisis. The non-stop slump in the gaming industry continues to pressure the city’s junket operators. Two of the biggest junkets in the industry, David Group and Neptune Guangdong Group, are to close two VIP rooms and fire 300 workers at the end of this month…David Group, which closed three of its seven VIP rooms at the beginning of the year…two more rooms will be shut at the end of this month. Kam Leong, Macau Business Daily, 6-9-15

Neptune Group Ltd, a Hong Kong-listed investor in the Macau VIP gambling sector, warned on Tuesday it was likely to make “a substantial loss” for the year ending June 30, 2015…said it expected more closures of Macau junket rooms, adding that visitors from mainland China to Macau were likely to be rationed to three trips every 60 days with effect from July 1…Neptune Group was once one of the biggest investors in Macau junkets measured by chip roll. Gross Gaming Revenue Asia, 6-10-15

The loss of the high-rollers due to the crackdown is only part of China’s policy changes that have impacted Macau. Smoking is another area where the government is attempting to improve Chinese society and in the process hitting Macau in the pocketbook. China is attacking cigarette smoking head on and it expects Macau to follow suit. The junket and casino operators have sought exceptions, but the government is not having it. One official said unambiguously, “This is about health, not business.” The impact of a total, non-smoking policy has not been felt yet. The policy has not been fully implemented, but it will be, and it will likely contribute another 10 or 15 percent a month to the declining revenues.

Anti-smoking campaigners at home and abroad have hailed a new regulation on tobacco use in Beijing as a major step forward in the country’s efforts to control smoking. The new rules, which took effect on Monday, are the toughest ever imposed in China, and could serve as a model to pave the way for national tobacco-control regulations. Wang Xiaodong, China Daily, 6-1-15

The Beijing city government’s new restrictions on smoking in public may encourage the Macau government to ban smoking in Macau’s casinos, Union Gaming Research Macau says. A note issued by the research house says: “Beijing’s tough stance on smoking could provide the Macau government with enough political cover to carry out their plans for a full smoking ban.” Macau Business, 6-1-15

Representatives of the Macau Junket Operators Association had a meeting with Secretary for Economy and Finance Lionel Leong Vai Tac to petition the city’s government to allow smoking lounges inside VIP rooms. Gross Gaming Revenue Asia, 6-1-15

Secretary of the Economy and Finance Lionel Leong Vai Tac has defended the government’s intention to ban smoking in casinos, arguing that public health takes priority over gaming revenue. Macau Business, 6-1-15

On the back of anti-corruption and anti-smoking campaigns, the Macau casino industry is at the beginning of a $20 billion expansion; five new projects are expected to open in a couple of years. Here again, the long arm of Beijing can be felt. The Chinese government has been pushing for a more diverse Macau, one that can attract visitors from all over Asia to Macau and China.

The mammoth task of transforming Macau from a highly lucrative but lopsided casino economy into a diverse Las Vegas-style tourist hub got under way with the glitzy opening of the second phase of Galaxy Macau. The $2.8 billion extension – which includes three hotels, two casinos and other entertainment facilities. It is also the first major grand opening of a casino since gaming revenues began to nosedive last year amid intensified pressure from Beijing to diversify the economy, President Xi Jinping’s crackdown on corruption and his calls for a gaming sector clean-up. Raquel Carvalho, South China Morning Post, 5-28-15

Diversity comes is expensive, it drives up both construction and operating costs. Galaxy’s new amenity-laden property just opened and the timing could not be worse, revenues are down and costs are going up. The new Galaxy complex was designed before the crackdown; nearly three billion dollars was spent with the expectation of a never-ending stream of high-rolling Chinese gamblers to service the debt. Sadly for Galaxy, the world has changed very much since those plans were laid. The stream of high-rollers has turned into a trickle. And even the second and third tiers of gamblers are being forced through additional bureaucratic funnels; all mainlanders are going to be limited to three or four trips per year to Macau.

The government’s table game allotment of 150 games only adds to Galaxy’s challenge; the original plan called for 500 mostly VIP tables. Now Galaxy will have to generate revenue from other sources to pay its debts. The $2.8 billion resort where 80 percent of the investment is in non-gaming amenities is forcing a change in strategy.

To be profitable, Galaxy has to expand its customer base and make effective use of the amenities. Galaxy also hopes to develop more “premium mass” and “mass market” table game play to replace the lost VIPS. The premium mass and mass market segments, while not generating the same volume of wagering, produce better margins than the VIP market. The other casinos are going to have to adapt a similar strategy. No one is throwing in the towel yet; there is too much money at stake. I think we can anticipate some pretty creative (and expensive) solutions. For example, Ponte 16 casino is replacing some tables with 100 electronic baccarat machines; if that works we can expect to see most casinos adding hundreds, if not thousands, of those hybrids of slot machines and table games.

Success Universe Group Ltd vice-chairman Hoffman Ma Ho Man has said his company means to replace two of the VIP gaming tables in its Ponte 16 casino with over 100 electronic baccarat machines in the next two months. Macau Business, 6-5-15

In a drastically changed Macau casino economy, new strategies will become a necessity. The first to step up to the plate and out of the box is Angela Leong. Ms Leong is developing a very different concept for the former Portuguese colony and gambling capital of Asia; she is planning to build a theme park. A theme park if it is successful would attract millions of families from Asia to Macau. That would please the Chinese government and possibly show the way out of the economic crisis caused by the loss of VIP gamblers.

SJM Holdings Ltd executive director Angela Leong has said the theme park she intends to build in Cotai will have five hotels and will put on entertainment suitable for families. The theme park will be next to the Lisboa Palace, which SJM Holdings owns. Macau Business, 6-5-15

China is not going to relax its pressure on Macau customers and casinos. And while China makes things difficult, the rest of the Asia-Pacific region is tripping over itself to get some of the 1.8 billion Chinese to visit. By 2020 there will be three new casino-resorts in South Korea and at least two each in the Philippines, Australia, New Zealand and Russia’s integrated entertainment zone and all are aimed at Chinese gamblers. Almost overnight, Macau has gone from the ultimate prize in casino gambling to one of the most challenging operating environments in the world. And that is the update from Macau for this month.


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