Betting on red

Could Macau’s casinos become a bargaining chip in the trade war?


Licences at Macau’s casinos are coming up for renewal

The Sands casino in Macau opened in May 2004. In less than a year its boss Sheldon Adelson recouped his $265 million investment. The gaming mogul took his company public a few months later. By 2008, according to the New Yorker, his personal wealth had multiplied 14 times and was growing by a million dollars an hour.

This surge in net worth was largely based on Adelson’s success in securing one of the six gaming concessions in Macau, easily the world’s biggest gambling hub.

Allegedly, helping the American win the licence was his earlier support for Beijing’s bid to host the 2008 Olympic Games. Details on how Adelson helped kill measures in Congress aimed at stopping Beijing from hosting the games were extensively reported by the media after Sands was taken to court in 2008 by a Hong Kong businessman.

More recently Macau’s newspapers have been revisiting the story, but this time in the context of the Sino-US trade war. The view is that Macau’s US-operated casinos could again be called into action to lobby on Beijing’s behalf – or suffer the consequences.

Three of the six main casino operators are US companies, including Sands, MGM and Wynn (though the latter sold a 5% stake in its New York-listed unit to Hong Kong’s Galaxy in March). But the lucrative gaming licences in the enclave will start to expire in March 2020, beginning with the pair held by MGM and local tycoon Stanley Ho’s SJM.

According to a report by Macanese newspaper Jornal San Wa Ou last month, Macau will pick a new chief executive before the end of 2019. But instead of leaving the licencing issue to the next government, incumbent Fernando Chui is under pressure to iron out the details on the renewal process.

Macau’s gaming laws actually allow for just three concessions. In early 2002, SJM, Wynn and Galaxy were picked out of 21 bidders to get the licences. Competition was fierce (at one point Galaxy chairman Lui Che Woo reported that a coffin had been left at his hotel’s front door). Then in a spectacular change by regulators later that year, the Macau government announced that three new sub-concessions were to be spun off from the main licences.

As a result Sands operates with a sub-concession that was issued by Galaxy in late 2002 – for which it paid nothing. SJM later granted another sub-licence to MGM for $200 million in 2005. A year later Melco, run by Stanley Ho’s son Lawrence, paid Wynn $900 million for the last sub-concession.

So far the Macanese government has been coy on the fate of the six concessions – which by local law are entirely the assets of the government – once they expire.

There is no certainty that existing operators will get to renew their licences automatically. Indeed, Chui hinted last year that his administration might trigger a new bidding process. This could also lead to a revision in the number of concessions on offer.

“In all likelihood, the central government would take on an influential role in deciding the way forward, especially in the face of China’s escalating trade war with the US,” Jornal San Wa has suggested, ignoring rather blithely that Macau, like Hong Kong, operates under the so-called “one country, two systems” principle that allows it a high degree of autonomy from Beijing.

The newspaper is hardly alone in that assumption, nor in sensing the geopolitical risk for the foreign firms invested in Macau’s gaming market.

“Should relations [between China and the US] deteriorate further, Beijing may ask itself why it needs to tolerate so much money being repatriated by the US casinos,” Steve Vickers, formerly a police officer in Hong Kong who now runs a corporate risk consultancy, told the South China Morning Post this summer.

“It would surely be better from Beijing’s perspective that the gaming proceeds go to more loyal and local champions, not foreign firms. And especially not to those controlled by China’s main economic rival.”

Companies like Sands have brushed off the concerns over the deterioration in Sino-US relations, as well as speculation over its continuing presence in Macau.

Buoyed by strong income from its flagship properties the Venetian and Sands Cotai Central, the company’s Hong Kong-listed unit saw revenues grow 13% to $2.15 billion in the third quarter this year.

“We’ve seen it all over the years. We’ve seen these restrictions, union pay issues, junket difficulties, border restrictions, the great recession,” said Sands China’s president Rob Goldstein during an analyst meeting last month, reiterating that it will invest another $2 billion in Macau over the next couple of years. “We believe our concession renewal is not at risk,” he assured.

According to data from Macau’s Gaming Inspection and Coordination Bureau, there were more than 6,500 gaming tables operated by 41 casinos as of the end of June. All of these venues are ‘owned’ by the six concession holders but many of them are run by third parties, who pay a fee to the concession holders to ‘borrow’ their licence rights.

As Oriental Daily has put it, there are in fact “6.5 concession holders” in Macau, given that these satellite casinos have been getting bigger and bigger. However, anticipating a more difficult environment ahead, the newspaper reports that some of the lesser players (which are typically listed in Hong Kong) have been putting their casinos up for sale.

Even Melco, one of the sub-concession holders, seems reluctant to have all its eggs in one basket. Over the past few years, it has been on a quest to diversify into other markets such as Australia, the Philippines and Cyprus. Lawrence Ho, Melco’s chairman, told the Nikkei newspaper earlier this year that his company could invest more than $10 billion if it is allowed to open a casino complex in Japan, for instance. (Tokyo passed legislation in July to pave the way for a gambling sector that could rival Macau’s).

Nonetheless, Macau remains the crown jewel for global gaming firms given its proximity to China’s millions of baccarat players. And its less of a surprise, perhaps, that Melco’s Ho has been an enthusiastic supporter of Beijing’s policy agenda. Last week, Black Spade Capital, his family office, launched the first corporate bond denominated in the Macau currency, the pataca (MOP). The two-year notes are valued at MOP2 billion ($248 million) and come with a coupon rate of 3.1%.

Both the MOP and the Hong Kong dollar circulate in Macau but the latter is generally preferred for bigger transactions such as property deals, Macau Daily Times said. That means people holding larger amounts of pataca have few options to park their cash, besides banking saving accounts.

Ho’s bond issue offers at least one alternative. But how will he use the proceeds? Nothing has been specified, although Black Spade executives said they will look for investment opportunities in “non-gaming sectors” in the Greater Bay Area (GBA).

Of course, this would also be welcomed by the central government, which wants to promote the GBA as a new megalopolis combining Macau, Shenzhen, Guangzhou and Hong Kong. Infrastructure projects have been weaving Macau more tightly into the Greater Bay too, especially the opening of the Hong Kong-Zhuhai-Macau Bridge last month.

But political pressures in the enclave also seem to be rising as Beijing pushes the local government to reduce its reliance on the gaming sector. The strain seems to have reached the Liaison Office of the Central People’s Government (the Party’s senior representative in Macau) as evidenced when Zheng Xiaosong jumped to his death last month.

His suicide – for which the official explanation was depression – happened just days before he was scheduled to meet his boss, Xi Jinping, in Zhuhai (see WiC429).

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