An animal virus somehow jumped to humans in China in December. It has since spread across the world. As of February 13, the number of coronavirus cases was approaching 60,000 worldwide, and the virus, now called Covid-19, has been responsible for more than 1300 deaths; roughly 6000 patients are reported to have recovered. There have been 41 cases reported in Europe, 18 in North America and 15 in Australia. Many countries have either banned Chinese tourists or quarantined them, and the United States, France, and England, among other countries, have sent planes to Wuhan to evacuate their citizens. This virus is serious business, albeit not nearly on the scope of the Spanish flu of 1918, which infected 500 million people – roughly 27 percent of the world’s population at the time – and killed an estimated 50 million people worldwide. But we are still in the early stages of this epidemic, and it is therefore impossible to predict its ultimate course or severity.
The coronavirus was first reported on December 1. It apparently spread from bats to pangolins and then to people in an open meat market in Wuhan, China. In the first few days, the virus attracted little attention outside of Wuhan, but as the number of cases increased and the virus spread to other places, protective measures were put in place. Hong Kong and Macau reacted quickly, restricting public gatherings and movement. On February 4, the government of Macau ordered the city’s casinos and government offices closed for two weeks. Later in the week, Las Vegas Sands CEO Robert Goldstein said he believed the closure could last as long as two months.
“It’s a scary time for all of us,” Goldstein said. “It could be two weeks; it could be two months. These things are unpredictable.”
That same week, the Las Vegas Sands and Wynn Resorts reported operating results for the previous quarter. The quarter wasn’t the best for any of the casino operators in Macau: the United States and China were in a trade war, China was putting additional pressure on potential high-rollers, and, in December, Chinese President Xi Jinping visited Macau to celebrate the 20th anniversary of Macau’s return to Chinese rule. It seems that the week Xi was in town, VIP gamblers stayed away. If they gambled at all, they went to the Philippines, Cambodia or Vietnam, all of which are competing for the same gamblers as Macau.
The flu is hitting Sands and Wynn Resorts in the pocketbook in a big way. Sands and Wynn get the lion’s share of their revenue from Macau. In their recent quarterly earnings call, Wynn CEO Matt Maddox said Wynn Macau was losing between $2.4 and $2.6 million a day; the doors of the casinos are closed, but the employees are still drawing their salaries, and debt payments and other fixed costs must still be paid. In the last decade Macau has become the most significant casino jurisdiction in the world. Casino revenue grew from $10.3 billion in 2007, the year the first Sands casino opened, to $45 billion in 2013, the year before President Xi cracked down on corruption in China. After the crackdown, revenues dropped every year until 2016, bottoming out that year at $27.9 billion. By 2018, revenues had climbed back up to $37.6 billion; 2019 was down three percent from that number, to $36.47 billion.
Those are huge numbers. By way of contrast, Nevada recorded approximately $12 billion in revenue for 2019. That revenue, reported by the Nevada Gaming Control Board, came from 441 operations in the state. Macau has 41 casinos.
Those numbers make Macau very attractive to casino companies, but operating in that tightly controlled marked comes at a price. The effective tax rate is 39 percent, and the casinos, under pressure from China, have needed to invest billions of dollars to make their resorts popular to tourists from around the world. To this point, the reward of operating in Macau has been worth the price. The casino closures add some doubt to that proposition. If the shutdown should last three months, six months or a year or more, will Sands, Wynn and MGM survive the financial crisis that would create? Moreover, it begs another question: how many of your eggs should be in one basket?
In the Nineties, when I was new to consulting, I remember reading somewhere about the dangers of a “sugar daddy”. In that context, a sugar daddy was a client or customer that represents the majority, or the totality, of your business. The article made the point that, over time, those relationships are bound to be challenged, whether from a competitor, a change in the popularity of a given product or service, an economic downturn, or, in this case, a flu that emerged seemingly from nowhere to infect both your client and your customers. Nothing makes a stronger argument for greater diversification than a crisis like the one ongoing in China and Macau.
That said, a threat to the earnings of two or three already dominant casino operators is minor compared to the potential threat Covid-19 poses to the world. The first concern is, of course, the health of the more than 7 billion people in the world. The current numbers of infected are relatively small, but if the epidemic approached 1918 proportions, nearly 2 billion people would ultimately be infected. 200 million or might perish. The second-tier threat is the world’s economy. China is the second largest economy in the world, and if China goes into a tailspin every country will feel its tail wind. In the United States, we would be forced to realize just how large a part of our economy China has become. We could face major shortages of drugs, technology and other goods; those relationships are currently somewhat hidden, but if the supply from China dried up, the full impact of our reliance on China would be apparent. It would also make clear that countries can be overly dependent on another single country just as easily as companies and individuals can. Anyone can fall victim to the sugar daddy syndrome.
In the global economy, China is becoming the world’s sugar daddy. If China catches a cold, many other countries will come down with pneumonia. As recently as the SARS outbreak in 2003, that was not true. Covid-19 may not lead to any of those dire consequences, but it is certainly exposing the possibility, and making clear China’s new position in the world’s economy. For a more secure future, Las Vegas Sands and Wynn Resorts probably need to diversify away from Macau and Asia. And as a country, we need to diversify from China. Like the casinos in Macau, we have too many eggs in one basket.
