China: A Monster on the Horizon By Ken Adams July 22, 2015 at 7:35 pm June is in the books and it was another dismal month in Macau; gaming revenue fell 37 percent. Fewer people are going to Macau and the ones who are going are spending less; it is a thirteen-month-old story. Galaxy hopes to change that with its new properties. Galaxy Macau Phase 2 and Broadway at Galaxy Macau opened on May 27th adding to both the room and table game inventory. Galaxy did not change the trend and it has not expanded the market. Nothing stands much chance of expanding the market until the government changes its policies. Macau’s gambling revenue fell to a five-year low in June of 36.2 percent…13 straight months since China’s crackdown on corruption took off. Asia Gaming Brief, 7-1-15 Visitors on package tours from mainland China (653,000), dropped by 2 percent. Macau Daily Times, 7-1-15 Macau’s number of hotels rose by three to 102 but the number of hotel guests dropped 2.7 percent year-on-year…The number of guestrooms rose 7.2 percent to 30,000. Macau News, 7-1-15 The Chinese government is not backing away from its corruption crackdown; in fact it is upping the pressure. The government is promising to conduct surveillance on government officials traveling abroad, to investigate corruption in the national lottery and the stock market. It also reported extraditing over 200 people from 30 countries in its crackdown. The search for corruption criminals is called Fox Hunt 2015 – the Chinese do love to give a catchy name to things. The newspaper quotes the People’s Daily, an organ of the Communist Party of China, as saying the party’s Central Commission for Discipline Inspection will use the country’s telecommunications companies to keep tabs on mainland officials when they are abroad…it expects this to curb VIP gaming business. Macau Business, 7-2-15 Meanwhile back in Macau, a full smoking ban is headed to the casinos. China is very serious about reducing cigarette smoking and Macau is duly bound to follow suit. Or is it? The ban does not have an implementation date yet and it is still being debated. In fact, there is even some belief developing that the government is backing down slightly. The Macau Junket Operators Association threatened that its members would quit Macau if a full smoking ban in casinos results in a further decrease in the VIP gaming business. Macau News, 7-13-15 The government is open to the idea of continuing to permit smoking in casinos, an official has indicated. Macau Business, 7-13-15 The smoking-ban is still being debated, but the government has eased visa restrictions. Apparently, the falling revenues are catching China’s attention, as it has decided to allow Chinese citizens to go to Macau twice in thirty days instead of once in sixty days and to extend their stay two more days to seven. It isn’t much, but in time it might help a little. Macau’s deteriorating economy has been a nudge for the government to think more constructively on its agenda to balance economic diversification and full employment. Asia Gaming Brief, 7-14-15 From July 1, mainland China passport holders can stay seven days in Macau, up from five days, and gain second entry within 30 days, rather than 60 days. Macau News, 7-2-15 It is too soon for the visa changes to have an impact and the casinos remain in a very difficult situation. They are being forced to fight each other tooth and nail for every gambler, both premium and mass market. The competition is pushing the cost of doing business up dramatically at the same time the revenues are falling. Rising costs and sinking revenues are not a good combination for profitability. Still, one suspects that with 1.8 billion people on the mainland, the casinos are not upside down just yet. Operators have thus embarked upon a promotion war…the promotional budget of casino operators reached 10.2 per cent of all mass gaming revenues. Luis Gonçalves,Macau Business Daily, 7-1-15 Morgan Stanley says by the end of 2018, they expect staff costs to grow by 15 percent, 18 percent and 31 percent in 2015, 2016 and 2017. Asia Gaming Brief, 7-8-15 Far from upside down, the casinos in Macau are still the busiest in the world. Macau gaming revenue dwarfs the revenue from any country, except the United States. Galaxy alone generates more gaming revenue than the combined revenue of the casinos in Singapore or Australia. It would be something to celebrate, if it were not for the downward revenue spiral. Macau casinos took eight of the top ten places in a ranking for the world’s top venues by gross gambling yield (GGY) in the Global Gambling Report’s 10th edition…United States with $62.16 billion in 2014…Canada, Singapore and Australia trail well behind, with $7.30 billion, $4.11 billion and just under $4.00 billion respectively…Galaxy Macau…generated $5.85 billion in 2014…Wynn Macau is in fourth with $3.59 billion; Sands China Ltd’s the Venetian Macao is fifth with $3.55 billion; MGM China Holdings Ltd’s MGM Macau is sixth with $3.24 billion. Gross Gaming Revenue Asia, 7-15-15 This is no time for celebration and there is no time for celebrations in sight. The government crackdown is destroying a once dynamic and expanding industry in Macau. There is the possibility of a complete smoking ban and that will exacerbate the revenue problems. And as if that were not enough, new casinos and hotels are opening in an already crowded market. Could it get worse? Oh, yes it could and it may. An academic study just completed suggests Macau is overwhelmed and cannot handle all of the Mainland business. The overflow will slip away to Cambodia, Vietnam, Singapore, the Philippines and Russia. The study advises China to legalize casinos on the Mainland to keep all of that Chinese money at home. The Macau gaming industry does not have the capacity to fully supply the Mainland market thus to avoid capital flight to other countries the central government should legalize gaming. This is the conclusion of the research conducted by Macau Polytechnic Institute. João Santos Filipe, Macau Business Daily, 7-15-15 The study estimates that the gross gaming revenue of the Chinese people is $161 billion a year. That is a pretty big number, large enough to support many more casinos than exist in Macau. For example, the United States has approximately 1500 casinos and hundreds of card rooms, free-standing slot machine locations, bingo parlors, off and on track racing and thousands of lottery outlets to serve a population one fifth the size of China’s. The problem for Macau is not gamblers or casinos, it is distance. The distance between those Chinese gamblers and the casinos in Macau is too great if casinos are built on the Mainland. With casinos in China there will be no reason for VIP high-rolling gamblers, mass market players or casual tourists to go to Macau. Macau has one advantage – it has a monopoly. However, there is a threat to that monopoly on the horizon – a monster in the form of casinos on the mainland. If the threat becomes a reality, Macau will become a very quiet backwater of history; a victim of its own success.