Macau’s emergence as the world’s casino capital was explosive once it opened up its gambling industry to new entrants in 2002. Five new casino firms sparked a transformation in the special administrative region on the coastal fringe of Guangdong province, which overtook Las Vegas in gaming revenues within four years.
Commentators were still marvelling that by 2019 a city less than a tenth the area of its American rival was earning $36 billion in gaming revenues, or more than six times as much as Las Vegas.
All of that was before the pandemic, which has brought three years of disaster to Macau’s economy, reducing its casino sector to a fraction of its former levels. At a similar time, the licences for the casino operators were coming up for review by the Macanese government, adding to the uncertainty about their prospects. But last Saturday a decision was finally made on their futures, with each of the current concessions holders granted the rights to carry on. Covid has ravaged their revenues, but might it also have protected their privileged position in Macau for the next 10 years?
It was less of a shake-up than anticipated?
There had been talk for some time of a day of reckoning for the American operators, who risked being marginalised in the bidding process because of political tensions between Beijing and Washington. The fears that Beijing would press for Chinese-backed companies to get more of the spoils in Macau were overblown, however. In fact, there was no change to the roster of casino firms in the gaming enclave. The announcement last weekend was that all six of the existing licence holders would keep their concessions for 10 years, albeit a shorter period than the previous term of 20 years.
Genting, a gaming and tourism operator headquartered in Malaysia, had joined the tendering process after missing out in the initial competition to win a casino concession when Macau opened up to new licence holders 20 years ago. With a track record in non-gaming businesses, including two of the largest theme parks in Southeast Asia, it was seen as a genuine contender this time around, because of the way that the government has made diversification from gambling into a key strategy for its tourism sector.
And yet Genting didn’t win a licence, coming last in the assessment process. Instead there was a strong sense that a decision was taken to stick with the current operators because the government wants continuity at a time of crisis in Macau’s economy, which has been ravaged by restrictions on visitor flows from its key market in mainland China.
“It would seem that Macau prefers the status quo to change and potential new opportunities,” agreed Ben Lee, managing partner at IGamix Management & Consulting, in comments cited by the South China Morning Post. “Our speculation is that employment continuity is probably the overriding consideration.”
The government scored each of the applications against a number of criteria, with three getting priority: maintaining local employment; plans to grow the market in overseas visitors; and the development of non-gaming projects. The weighting of each of the factors wasn’t disclosed, nor the amounts of investment pledged by each bidder, although analysts have been speculating that each was asked to agree to minimum commitments of between $2 and $3 billion over the licence period.
Despite the investment commitments implicit in winning their bids, investors were relieved that a long period of uncertainty had come to an end. Shares in the casino firms responded positively to the news of the renewals, with the American operators reporting some of the biggest price increases in trading in Hong Kong. MGM China rose 13%, Sands China 8.4% and Wynn Macau just over 15% on Monday. In fact, the share price of Wynn‘s Hong Kong-listed unit has more than doubled since last month. Sands China has also gained nearly 70% during the same period.
Did Covid make the government more cautious about changes?
Job protection was high on the agenda after nearly three years of paralysis in the casino sector, which contributes about 80% of Macau’s tax revenues.
Visitor numbers have dwindled to less than 20% of pre-pandemic levels and sometimes much lower – there were fewer than 10,000 arrivals in July this year, the lowest since the virus was first reported – and the casino operators have been forced to shoulder massive operating losses.
Hopes rose in early October that the worst might be over when the authorities announced a partial loosening of Covid protocols for visitors from mainland China and restarted a programme of electronic visas for individual travellers. But curbs were soon reintroduced after a handful of new cases of infection, including a three-day lockdown of more than a thousand people at one of the leading resorts in the city. All of Macau’s 700,000 residents were then instructed to take rapid antigen tests shortly after.
Group tours, which were expected to restart in November, are yet to resume, and Macau’s tourism bosses acknowledged this month that there is an ongoing discussion with the Chinese health authorities about how to limit the risk of new infections in the event of a fuller resumption of visitor flows.
In an alternative signal that the city is desperate to get more tourists back, the local government decided against closing another casino, the StarWorld, last weekend after a visit from a Covid-infected tourist, however. “In our opinion, he did not have contact with many people, nor did he visit many places. We did not think it necessary to place the hotel under control measures,” Macau’s Secretary for Social Affairs and Culture told TDM, a local news channel, triggering talk that a more flexible approach to responding to cases of Covid-19 could be taking shape.
But in the meantime Macau lacks a clear direction on how it is going to get back to business as usual. Even in cases of a partial relaxation of travel restrictions for mainland visitors, gambling revenue is unlikely to pick up in the near term, most analysts agree. Many have queried whether the city will ever return to the boom times it enjoyed before the pandemic.
Maybe that’s why there was only one addition to the bidding for the new licences. Newcomers would need to invest much more in their presence in Macau than the existing casino firms, which have already sunk billions of dollars into the territory, of course. But with no clear sense of how long it might take for China’s Covid crisis to subside, there is little way of knowing how long Macau could be mothballed as a destination either.
In that context there was the suggestion that Genting might have drawn an ace by losing out on a licence this month. Yin Shao Yang, an analyst at Maybank in Malaysia, certainly thinks so, telling gaming publication GGR Asia that the feedback from Genting’s investors was that they were “not disappointed” that the firm had missed out. “They just don’t see Macau turning around so soon,” he added, noting the awful performance of its gaming sector in recent months.
Longer-term, is the plan that the casinos will be part of Macau’s transformation?
The bidding for new licences comes at a time when Macau’s government is trying to reduce its reliance on the industry that has made the city famous. The latest policy address from Ho Iat Seng, Macau’s chief executive, set targets for gaming’s contribution to GDP to drop to 40% (from 50% before the pandemic in 2018, and 28% last year). The plan is that emerging sectors like health, financial services as well as conferences and exhibitions will take on more of the load, while the casino concessionaires have also been tasked with refashioning the tourism scene by developing their non-gaming capabilities and increasing their reach to visitors outside mainland China and Hong Kong.
Reinventing Macau as a city known for something other than gambling is going to be a challenge, however. As an ambition it has been talked about for some time, yet the local economy is still dependent on income from games like baccarat, and on visitors from mainland China and Hong Kong.
Admittedly there were signs of a shift in emphasis from high-roller gamblers to more of a focus on customers in the mass-market before Covid struck, alongside a tighter regulatory grip on the junket agents who introduce the highest-spending players. That was also in line with Beijing’s distaste for some of the more nefarious activity in the city, where the casinos have been criticised for abetting corruption, capital flight and other improper behaviour. For instance, Alvin Chau, head of the city’s biggest junket operator Suncity, was arrested last year pending trial on over 200 charges including money laundering and running a criminal syndicate.
Current licence holders like Sands China and Wynn Macau have already made a start on broadening Macau’s appeal as a destination by putting money into convention and exhibition facilities, as well as other non-gaming attractions like restaurants and entertainment venues. But the revenue derived from these assets is tiny compared to the take from the tables, especially as interest in non-gaming activities from mainland Chinese visitors is often fleeting.
That investment has still served a purpose in helping the casinos win their licence renewals, because it was unclear what would happen to their non-gaming infrastructure if they lost out in the bidding. The possibility was that they would have been required to give up the rights to run casino operations but not the hotels, retail and entertainment space that surround them. Maybe that was another factor in this month’s decision to stick with the status quo as well. “The benefits of incumbency cannot be overstated. Even if Genting had presented an otherwise-winning bid, it must be remembered that the concessions relate only to the operation of casinos,” David Green, founder of Newpage Consulting and a former gaming regulator in Australia, told GGR Asia.
The licence holders will get leeway to hold back on investing in new facilities until the worst of the Covid crisis is over. But the bid to transform Macau is being outlined as a more dramatic effort to reshape the foundations of its economy. Sceptics counter that there are major impediments to the diversification effort, not least an underdeveloped talent pool in which about 45% of local residents are employed as administrative, service or sales workers, while 24% have lower-skilled jobs, according to an assessment from the IMF last year. Less than a fifth of the working population works in the professional or technical roles that would support an increased profile for industries like technology or health services either.
Another major problem is that Macau has hardly any space to offer to businesses setting up in these sectors. Such is the shortage of land that the strategy has been to channel much of the newer activity into the adjoining district of Hengqin, an island about three times the size of Macau. The hope is that this zone will become a seedbed for companies unrelated to gambling (which isn’t allowed on mainland Chinese soil). But some of the same questions on why businesses might want to set up there, and how they are going to be staffed by appropriately qualified people, are as unresolved as they are in Macau itself.
The more likely scenario is that Macau will be forced into focusing on gambling for the foreseeable future, starting out with an effort to recover from the Covid-inflicted losses of the last three years. The casinos are making a similar bet in calculating that the investment required under the new licences will soon be recovered from the action at the tables. The pandemic has mauled the old casino maxim that the house always wins. But gaming bosses will be hoping that the reversal is temporary and that they will soon get back to their winning ways again.
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