Up, Up and Away – Maybe

The revenue crisis in Macau seems to have ended.  Gaming revenues have been rising for nine months after plunging for twenty-six months.  Until May 2014, casino revenues in Macau had increased month over month for ten years, peaking at $45 billion.  Up to that point there seemed to be no limit on gaming’s growth in Macau.  And then seemingly out of the blue, China decided to rid itself of corrupt officials.  Instantly, casino revenue started to fall as the high-rolling gamblers from Mainland China disappeared.  In retrospect, it seems Chinese government and business officials had been taking illegally gained money from the mainland to gamble in Macau.  To make matters worse, the Chinese economy which had been growing nearly as dramatically as Macau’s gaming economy stalled.  The downward spiral in Macau continued until August 2016 and then as abruptly as the trend began, it stopped and started to reverse directions.

Revenue has risen every month since last August.  At first, no one was willing to say the downward trend had stopped.  However, with each passing month casino operators, professional analysts and government officials have gained confidence in the upward trend. Nobody has been more confident than Lawrence Ho.  He thinks gaming is coming back, all the way back to 2013 levels. Recently Ho said, “Definitely within the next five years, it will grow back to a $45 billion gaming market.  And that’s just the gaming alone, because the non-gaming part is significant.” Ho is the chairman of Melco Resorts, a former partner of James Packer and the son of Stanley Ho, the grandfather of casino gambling; he also has two sisters with senior management positions in Macau.  Ho is Chinese and grew up in Macau and in gaming; he was there when the Macau reverted to Chinese control and he was one of the first recipients of the new licenses in 2003. All of that makes him an expert on gambling in Macau, so it would be foolish to dismiss his opinion offhand.

However, not every experienced observer and insider sees the same rosy future as Ho.  Pansy Ho, a sister, has some grave concerns about an industry built increasingly around non-gaming tourism.  Besides President Xi of China’s policy to eliminate corrupt officials, his government has been adamant that Macau must move past gambling and become an international tourist destination.  To meet that mandate all of the casinos currently under construction and those finished in the last three years have spent billions of dollars each on creating full resorts with hotels, convention facilities, a wide range of restaurants, entertainment and special tourist attractions.  Pansy says making those amenities pay for themselves is not easy.  One of the companies with which she is associated, reported significant losses in its hospitality division.  Ms. Ho thinks the city will to need to find “its own methodology” in diversification because the current one is not working.

The worst part of the campaign against corruption is probably over.   However, there are some dangling issues that connect the current situation to the crackdown and suggest it is not over yet.  In April, a former mainland provisional governor named Chen was removed from office.  The prosecutor in the case used language that suggests there is an unstated political agenda involved in the process.  The prosecutor said “Chen was politically climbing to power, economically insatiable and morally bankrupt. Even after the 18th CPC National Congress, he still showed no sign of restraint and [his wrongdoings] were of a grave nature.”  It is the kind of demonizing language that characterized the purges of Cultural Revolution.

Another indicator that all is not well beneath the surface can be found in the activities of the Commission against Corruption.  The commission has become very visible; in every meeting of officials in Macau a commission representative is present; including meetings with Chinese officials, international tourism gatherings and local cultural functions. There is a press announcement, at least weekly, concerning a new or an ongoing investigation into wrongdoings. I do not know what that means, except it seems like an implied threat.  Reading between the lines is a highly specialized skill in China.

Zhang Dejiang, the Chinese official responsible for oversight of Macau and Hong Kong, was in Macau in  early May.  Zhang stayed three days and made a number of appearances, making a speech each time.  He had one very constant theme saying over and over that government officials and lawmakers needed to commit to the “One Government, Two Systems” policy.  He suggested a loyalty pledge is in order and reiterated that all concerned should become more familiar with the meaning of the policy.  Attempting to read between the lines, it sounds more like a threat, a promise to punish misbehavior rather than a pat on the head for a job well done.  Regardless of the true meaning of his words, he had an instant impact on gaming.  Analysts gave Zhang credit for a decline in revenues during his visit.

In the midst of the turmoil of the last three years, several new properties have opened. The market may be expanding, but all the casinos within the market are not necessarily sharing in the good times.  In fact, recently I came upon an interesting story in the Macau Daily Times.  It suggests that for some properties these are not good times.   According to the article, City of Dreams, one of the latest multi-billion-dollar resorts to open, is having weekly drawings for free airline tickets.  Three times a week at 8 pm gamblers get a chance to win a “Travel without Limits” ticket, allowing them to travel as much as they want for a full year.  Now, I don’t know about your experience, but in mine, drawings like that take place when business is slow.  Oh, and I forgot to mention, City of Dreams is owned by Lawrence Ho’s company.   Regardless of City of Dreams and drawings, gaming revenues in Macau are moving up significantly.  The way the revenue trend in Macau reversed is very rare.  But everything about Macau is rare and different.  The gaming industry has never seen anything quite like it and today it may be up, up and away and tomorrow it could be down, down and down.


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