The fog may be lifting in Macau, a least slightly. Several recent events illustrate the issues and point toward potential changes in gaming there.
To begin with, the Gaming Commission has reorganized itself and expanded, nearly doubling in size. The stated intent was to better oversee the gaming companies. At the time of the announcement, however, the underlying motivation seemed difficult to grasp. That is no longer true. The government of Macau has rereleased its five-year plan, which includes an expanded role for regulation. In the plan, Macau will concentrate on achieving its diversity goals and a sustainable tourism industry by 2025.
To accomplish the former task, new industries, including technology, finance, and retail will be encouraged. The latter will be addressed, in part, by limiting VIP gaming and thereby reducing the risk and volatility in gaming revenue. Casinos will not only have difficulty in getting permission for VIP tables, but will also be expected to concentrate efforts on mass-market gamblers instead. The issue may be moot, as other measures in China are set to curtail rich, high-rolling gamblers.
In addition, the oversight of casinos will pass directly into the hands of the government. Authorities propose an increase of legal requirements that include suitability evaluation, worker guarantees, non-gaming elements, cash deposits, junkets, the number of licenses and concessionaires, the distribution of dividends, the percentage of shares owned locally, and concessionaires’ social responsibility.
As with all such communications from officials in China and Macau, the announcement was vague and without any detail. Still, it caused a major meltdown in the stock prices of Sands China, Wynn Macau, Galaxy, MGM China, and Melco. In one day, the group lost 26 percent of its value, more than $18 billion. The selloff was driven by fear that China was getting ready to make it impossible for a casino-resort to make a profit in Macau — or worse, drive the Americans out of town.
The fear is easy to understand: China has been cracking down on many business practices and social behaviors. The crackdowns have had a major impact on Chinese companies. The possibility that China’s “social credit score” could be extended to gambling is particularly frightening for investors. But it certainly lurks on the sidelines, as China increases its pressure on non-acceptable conduct.
However, by the day following the initial meltdown, numerous experts and Macau insiders had begun to recommend caution. They all believed that the market’s reaction was extreme, even foolish. Each of the experts stated that everything on the laundry list of potential changes had already been known. And of course, without any detail, it is impossible to predict the actual impact. The only certainty is the public consultation; that began on September 15. The licensees, junketeers, and other industry leaders will be surveyed first. That will be followed by four public consultations where local residents, elected officials, and other Macau businesses will be given a chance to express their views on the casino-resorts. The consultations are scheduled to be finished by the end of October. The officials then have six months to write a report and make recommendations.
The recommendations will then be drafted into law, which will go before the Legislative Assembly of Macau. In the meantime, the first of the casino licenses begins to expire in 2022. It is almost certain that the date will be extended until the final law is in place. At that point, operators will be given an opportunity to present their proposals for a license. By then, it will probably be sometime in late 2023. That should leave plenty of time for the casinos in Macau to recover from the pandemic and get back on the path to profitability. Between now and 2023, the casino operators will continue to do everything they can to appease officials in China and Macau. It is a game they have each learned to play very well. Don’t expect any of them to be hauled away in chains anytime soon. Thus, if you own stock in any of those companies, you probably have lots to time to decide if it is a good investment.
One of those taking issue with the market overreaction was Andrew Scott of Inside Asian Gaming. Scott says the reasons that casinos in Macau have been so successful are “the Chinese propensity to gamble, Macau’s proximity to mainland China with its 1.4 billion people and particularly its richest province of Guangdong with a population of 125 million, the general rise in wealth of China and its rapidly expanding middle class, and an enormous multi-billion investment by the six concessionaire companies…” He concludes his analysis by saying none of that has changed, so just relax.
I admit to having jumped to conclusions, but Scott and others like him talked me down off the ledge. So now with the benefit of their inside knowledge, I’m forced to conclude that Macau is not entering a new era, at least not yet. And if it is, no one knows what that era will look like.
The fog may be lifting in Macau, a least slightly. Several recent events illustrate the issues and point toward potential changes in the gaming there.
To begin with, the Gaming Commission has reorganized itself and expanded, nearly doubling in size. The stated intent was to better oversee the gaming companies. At the time of the announcement, however, the underlying motivation seemed difficult to grasp. That is no longer true. The government of Macau has rereleased its five-year plan, which includes an expanded role for regulation. In the plan, Macau will concentrate on achieving its diversity goals and a sustainable tourism industry by 2025.
To accomplish the former task, new industries, including technology, finance, and retail will be encouraged. The latter will be addressed, in part, by limiting VIP gaming and thereby reducing the risk and volatility in gaming revenue. Casinos will not only have difficulty in getting permission for VIP tables, but will also be expected to concentrate efforts on mass-market gamblers instead. The issue may be moot, as other measures in China are set to curtail rich, high-rolling gamblers.
In addition, the oversight of casinos will pass directly into the hands of the government. Authorities propose an increase of legal requirements that include suitability evaluation, worker guarantees, non-gaming elements, cash deposits, junkets, the number of licenses and concessionaires, the distribution of dividends, the percentage of shares owned locally, and concessionaires’ social responsibility.
As with all such communications from officials in China and Macau, the announcement was vague and without any detail. Still, it caused a major meltdown in the stock prices of Sands China, Wynn Macau, Galaxy, MGM China, and Melco. In one day, the group lost 26 percent of its value, more than $18 billion. The selloff was driven by fear that China was getting ready to make it impossible for a casino-resort to make a profit in Macau — or worse, drive the Americans out of town.
The fear is easy to understand: China has been cracking down on many business practices and social behaviors. The crackdowns have had a major impact on Chinese companies. The possibility that China’s “social credit score” could be extended to gambling is particularly frightening for investors. But it certainly lurks on the sidelines, as China increases its pressure on non-acceptable conduct.
However, by the day following the initial meltdown, numerous experts and Macau insiders had begun to recommend caution. They all believed that the market’s reaction was extreme, even foolish. Each of the experts stated that everything on the laundry list of potential changes had already been known. And of course, without any detail, it is impossible to predict the actual impact. The only certainly is the public consultation; that began on September 15. The licensees, junketeers, and other industry leaders will be surveyed first. That will be followed by four public consultations where local residents, elected officials, and other Macau businesses will be given a chance to express their views on the casino-resorts. The consultations are scheduled to be finished by the end of October. The officials then have six months to write a report and make recommendations.
The recommendations will then be drafted into law, which will go before the Legislative Assembly of Macau. In the meantime, the first of the casino licenses begins to expire in 2022. It is almost certain that the date will be extended until the final law is in place. At that point, operators will be given an opportunity to present their proposals for a license. By then, it will probably be sometime in late 2023. That should leave plenty of time for the casinos in Macau to recover from the pandemic and get back on the path to profitability. Between now and 2023, the casino operators will continue to do everything they can to appease officials in China and Macau. It is a game they have each learned to play very well. Don’t expect any of them to be hauled away in chains anytime soon. Thus, if you own stock in any of those companies, you probably have lots to time to decide if it is a good investment.
One of those taking issue with the market overreaction was Andrew Scott of Inside Asian Gaming. Scott says the reasons that casinos in Macau have been so successful are “the Chinese propensity to gamble, Macau’s proximity to mainland China with its 1.4 billion people and particularly its richest province of Guangdong with a population of 125 million, the general rise in wealth of China and its rapidly expanding middle class, and an enormous multi-billion investment by the six concessionaire companies…” He concludes his analysis by saying none of that has changed, so just relax.
I admit to having jumped to conclusions, but Scott and others like him talked me down off the ledge. So now with the benefit of their inside knowledge, I’m forced to conclude that Macau is not entering a new era, at least not yet. And if it is, no one knows what that era will look like.
