There are Hidden Troubles to be Faced

You might ask, as some have, why do I write so much about Macau? There are several reasons. Macau, even in decline, produces two or three times as much gaming revenue as Las Vegas and more than any other jurisdiction in the world. MGM, Las Vegas Sands and Wynn resorts are heavily invested in Macau and it is instructive. In the modern casino industry, it takes a billion dollars or more to build a competitive casino resort in any major jurisdiction. When that much money is at stake, the regulatory environment is extremely important. A casino developer, its investors and lenders need stable regulation and taxation upon which to build a profitable economic model. Any jurisdiction with an unpredictable regulatory environment is very risky. Macau is the textbook case; the stakes are high, and so are the risks. It takes $2-4 billion to build a resort in Macau and up to twenty months ago it was a stable and profitable place to do business. But then things started to destabilize and melt down in a manner reminiscent of Chernobyl. MGM, Sands and Wynn are in the process of expanding and that in my mind makes Macau very important. This time, as I often do, I used Wynn to illustrate some points. But the most important updates come from the horse’s mouth, China and the Chinese Communist Party.

Wynn Palace in Macau is scheduled to open June 25th. If it does not open on time, Wynn says the contractor will owe the company $200 million. The opening date may be known, but the number of table games is not; Steve Wynn publicly admits he has no idea how many games he will be allotted. The number of tables is very important as table games drive most of the revenue in a Macau casino. The most recent resort to open, Studio City received half of the games it requested. It opened in October with 200 tables. The Motley Fool estimates that Studio City is losing $730 million in annual revenue because it has 200 tables, instead of 400 it requested. Actually, the property, its cost and debt were predicated on 500 tables. In that case, Studio City is losing a billion dollars a year.

If we just assume that Studio City’s tables would generate $10,000 per day in revenue, the lost 200 table games amounts to $730 million in potential lost revenue. That’s an incredible lost opportunity for Melco Crown. Motley Fool, 2-14-16

Steve needs as many tables as he can get. Wynn Palace is doing its best to please the government. In that spirit, the company announced it will be buying locally. Besides following the government directives, Steve has stopped complaining publicly. In fact in his most recent earnings call, Wynn reversed courses again, and praised China for having done something “unequaled in the history of civilization.” Those efforts might not help Wynn Palace get more tables, but the stakes are too high to just stand by and do nothing.

“I mean managing China is a daunting task and they’ve got smart people doing it. And where they’ve come, you draw your confidence in the future from a careful study of the past… The government of Macau, of China, has been empirical and pragmatic and has brought hundreds of millions of people out of poverty, a feat unequaled in the history of civilization in any country. Obviously somebody is doing something wrong — doing something right, rather. They are tapping into the latent energy of that population.” Business Insider, 2-17-16

Wynn Macau Ltd, in cooperation with the Macau Chamber of Commerce, will endeavor to buy more of what it needs for its business in Macau. Wynn Resorts SA executive director Linda Chen told a press conference that the casino operator was answering a call by the government for the gaming industry to buy from Macau enterprises. Macau Business, 2-1-16

Wynn Palace is not the only new resort on the horizon. Las Vegas Sands and MGM Resorts all have new resorts under construction. Add those to Studio City and you have an overcrowded market with a shortage of revenue. Revenues were down in January for the 20th consecutive month. More casinos and less revenues are a recipe for disaster.

It might not be so bad, if the Chinese economy and restrictions on gaming tables were the only issues. And while both are significant, the most important problem is the Chinese government. The fortunes of Macau are determined in the inner sanctum of the communist party. The president of China and general secretary of the Communist Party, Xi Jinping is in the process of tightening his control over China; anyone who poses a threat to him or his policies is being eliminated. He eliminated many of Macau’s VIP gamblers and that is the central cause of the revenue declines. Xi is setting policies that will shape the future of Macau.

In December, Xi called the chief executive of Macau and the Chinese liaison officer in Macau to a meeting where they were given their instructions for the year. In their turn they gave hints of things to come. Central People’s Government Liaison Office Director Li Gang said China will continue to assist Macau. But Li also suggested that the society “should spare no effort to seize opportunities and be open to changes”. Excuse me sir, but what exactly does that mean? Of course, no one except insiders knows, the rest of us can only guess. At a reception hosted by Liaison Officer Li, Chief Executive Fernando Chui warned that Macau faces an overlapping of “old and new problems” and “severe challenges” as more “risks and hidden troubles” could lie ahead. I might ask again what that means, but the answer would be the same.

The central government will continue to come up with measures to support Macau’s economic development, Central People’s Government Liaison Office Director Li Gang said, adding that he was confident about the local economy. Li is the highest-ranked central government official posted to Macau. Macau News, 2-1-16

Local society should spare no effort to seize opportunities and be open to changes, Central People’s Government Liaison Office Director Li Gang said in his Chinese New. Macau News, 2-9-16

Chief Executive Fernando Chui Sai On said that Macau’s prospects for this year are that the city will still enjoy “good development opportunities” but he also admitted that it faces an overlapping of “old and new problems” and “severe challenges” as more “risks and hidden troubles” could lie ahead. Macau News, 2-1-16

The term “hidden troubles” is vague; it opens the door to many interpretations, none of which bode well for the casino operators in Macau. It is impossible to know what is happening or going to happen. Regardless of laws to the contrary, Macau is subject to the whims of one party and one man. Hong Kong is in somewhat the same position. Britain is threatening to sue China because it has violated the terms of agreement under which Hong Kong was turned over to China. There is no one to sue on behalf of Macau, but even if there were, it would not matter. What are the hidden troubles? President Xi is the only one who knows for sure.


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