The Future is Looking Mighty Dim in Macau

This has been a very long year for the casinos in Macau. With four months left in 2015, there are no reasons for optimism. Three major causes underlie the current crisis; Chinese government policy, limited numbers of high-rolling gamblers and increasing competition in Asia are driving revenues down and all of these factors will be impacting Macau for the foreseeable future.

However, the New York Times thinks a possibility for change in the mainland government’s anti-corruption crackdown exists. The article, Fading Economy and Graft Crackdown Rattle China’s Leaders, says the crackdown is causing much pain and distress within the party. Over 100,000 minor as well as many major party officials have been caught up in the crackdown and more are in the cross-hairs of party investigators. The Times sees a resistance movement developing as a result. It speculates that if the economy does not improve, a growing group of dissidents could force the government into letting up in its efforts.

On the morning of July 24, Zhou Benshun attended a meeting to promote one of President Xi Jinping’s signature projects. But by 6:10 p.m. that day, Mr. Zhou’s career was over, and he faced years in prison. Michael Forsythe/ Jonathan Ansfield, New York Times, 8-22-15

Mr. Xi’s campaign against corruption enjoys broad support in a nation where the widening gap between rich and poor is attributed to the ability of a small minority to prosper by abusing government positions or using political connections. As the economy falters, though, the risks for Mr. Xi multiply, said one retired party think tank official. Michael Forsythe/ Jonathan Ansfield, New York Times, 8-22-15

The policy is still in effect and still impacting Macau; in July gaming revenue declined again for the 14th straight month. It was down over 30 percent. In the last two years gaming revenue in July has declined from $3.6 billion to $2.3 billion. July 2013 was the peak; until then gaming had been growing year after year as if casinos in Macau were invincible and under a magic spell. Sadly, there was no magic; when the Chinese government decided to attack high-level crime and corruption the aura of invincibility disappeared.

Macau’s gross gaming revenue for July fell for the 14th straight month by 34.5 percent year-on-year to MOP18.62 billion ($2.33 billion. The figure takes the accumulated GGR for the past seven months to MOP140.26 billion, a YoY decline of 36.7 percent. Asia Gaming Brief, 8-3-15

No one in Macau has escaped the impact of the policy of the party and central government. All of the gaming operators reported dismal results for the second quarter. The American and Australian operators have operations in other locations, but Macau has been such a dominant segment of their business that a loss in Macau means a corporate loss.

The combined profits of Macau’s six gaming concessionaires were just over USD 3B for the first half of the year, down by 40% from just over USD 5B in the same period last year. Yogonet, 8-20-15

Wynn Macau recorded net revenues of $1.322 billion, down 36.8 percent. Macau Daily Times, 8-11-15

SJM Holdings gaming revenue decreased 40.3 percent to $3.3 billion. Asia Gaming Brief, 8-12-15

Crown Resorts Ltd reported a 41.3 percent fall in full-year net profit. Reuters, 8-13-15

Sands reported EBITDA of $1.09 billion, a decrease of 36.9 percent. Asia Gaming Brief, 8-14-15

Galaxy Entertainment Group Ltd. reported second-quarter earnings plunged 46 percent, Bloomberg, 8-19-15

The casino operators are scrambling to re-engineer their business model and focus on the mass market gamblers and on non-gambling amenities. Besides the loss of the VIP gamblers, the casinos are being forced to diversify by the government. Backed by the government in Beijing, Macau is mandating the development of additional attractions.

Macau’s chief executive said the government will spare no effort in diversifying the economy during this consolidation period for the gaming industry, by boosting the development of non-gaming elements. Asia Gaming Brief, 8-17-15

Lawrence Ho does not think it is a good long-term strategy. Ho sees no hope or profit in a conversion to a non-gaming tourism economy, but then he is a bit stressed. Ho’s Studio City is slated to open in October and he does not know how many tables will be allowed. The property pro forma was built on 500 table games, but now observers believe Studio City will only be allotted 140 tables. An average table in Macau wins $12,000 a day. The difference between 140 and 500 tables means $4 million dollars a day less than called for by the business model. Ho said the property must have more than the 140 games and thinks the property might fail at that rate. In fact his company has already hired an investment bank to help make a contingency plan.

But the policy makers don’t care what Ho or anyone else thinks about diversification. They are demanding it. The willingness and ability of an operator to expand its offerings will be part of the evaluation when the licenses come up for evaluation and renewal. The license renewal is still five years away, but it is beginning to shape the way people are thinking about Macau’s future. As I said earlier, government policy is the underlying cause of everything in Macau and government policy in China is always subject to change without notice.

The upcoming expiration of Macau’s casino concessions beginning in 2020 poses a fundamental risk to the six gaming operators. The Macau government has a track record of making last minute decisions, often seemingly by the seat of its pants. Macau has six casino operators instead of the initially planned three due to one such snap decision, and it could be snapped back or there could be more surprises ahead when licenses expire. Muhammad Cohen, Forbes, 8-17-15

Lawrence Ho’s Studio City is not going to be alone in being challenged, within the next twelve months four more properties are scheduled to open. That is just what everyone needs – more casinos to divide an ever shrinking pie. The new properties are going to join the existing ones in a very intense competition. They will be competing for table game allotments, for employees and of course for customers.

More competition is coming to Macau…the 1,600-room Macau Studio City Hotel-Casino is expected to open by the end of October. Las Vegas Sands said last week its $2.7 billion Parisian resort would open in 12 months, while Wynn Resorts set a late March opening for the $4.1 billion Wynn Palace. MGM Resorts International expects to open its $2.9 billion MGM Cotai late next year. Howard Stutz, Las Vegas Review-Journal, 8-4-15

In the meantime, Cambodia, Korea, Laos, the Philippines and Australia are developing resorts and strategies to attract the same Chinese gamblers that Macau wants. The Asian gaming market place is becoming very crowded. And that is my summary of the state of affairs in August for the casinos in Macau: unfriendly government policies and equally unfriendly competition together promise to make the rest of this year very difficult indeed. Oh and don’t forget the Chinese currency devaluation and the stock market crash. One analyst has estimated the devaluation alone will cost the casinos ten to fifteen percent of their revenues in the next four months. And thus, short of a new revolution in China, the future looks very dim for Macau.


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