Macau’s six casino operators are likely to see their licenses renewed for shorter tenors when they come up for renewal in 2020 and 2022 as China’s leaders see the licenses as a leverage over the United States, according to a source familiar with the situation.
When Macau opened its gaming industry in 2002 by issuing three new licenses, two of them were granted to US-controlled firms — Wynn Macau Ltd. (01128.HK) and Sands China Ltd. (01928.HK). American companies gained entry at that time as Chinese leaders wanted to return a favor to the US for Washington’s support of Beijing’s 2008 Olympic Games bid, the source told EJ Insight.
In 2005, SJM Holdings Ltd. (00880.HK) was allowed to grant a sub-license to MGM China Holdings Ltd. (02282.HK), a unit of the US-based MGM Resorts International.
Sino-US relations will be one of the criteria in keeping the casino licenses in the hands of American firms. Macau will no longer issue licenses valid for 20 years, while those for 10 years are likely to be shortened to five years, it is learnt.
With SJM breaking ground on its Lisboa Palace resort project in Cotai last Thursday, Macau’s gaming industry can be deemed to have entered a “stable development stage” from a “fast-growing development stage”, an observer said. Macau may stop issuing licenses for longer periods, with renewal of licenses every five years a more likely outcome.
From Beijing’s perspective, China needs to contain the US, which in the recent past had outlined its aim to expand its influence in the region through a “return to Asia” policy. Also, a more frequent review on US gaming license holders can help ward off criticism from some US lawmakers who had warned that Macau could be becoming a money laundering center.
Share prices of gaming firms are likely to come under some pressure in the short term due to the licensing issue.
Three main trends
Three main trends will sweep Macau’s gaming industry over the next decade as the city government aims to achieve sustainable economic growth and maintain social stability, market watchers said.
Focus will shift to mass-market gaming tables from VIP business, traditional franchisee casinos will be replaced by those directly operated by the six license holders, and non-gaming revenue streams will account for a bigger proportion of the operators’ overall income, the observers said, citing Chief Executive Fernando Chui’s policy address on Nov. 12, 2013 and some industry experts.
Macau saw its gaming revenue climb 18.6 percent year on year to 360.7 billion patacas (US$45.15 billion) lin 2013, according to the Gaming Inspection and Coordination Bureau.
While the world’s largest gaming destination continues to see phenomenal growth, the government is getting increasingly worried about the sustainability of such pace of expansion.
The gaming and related tourism industry contributed about 92.9 percent of the city’s gross domestic product in 2010, according to the World Travel and Tourism Council. An unexpected development such as a new global financial crisis or an outbreak of an infectious disease in the region will have a huge negative impact on the gaming industry and job market.
In 2006, Macau surpassed Las Vegas to become the world’s largest gaming city by revenue, following its moves to open up its gaming market by granting six casino operating licenses from 2002 and Beijing’s decision in 2003 to allow individual mainland tourists to visit Hong Kong and Macau.
However, fissures started appearing in the social fabric. On May 1, 2007, Labor Day, thousands of angry local workers marched on the streets of the city to assail the government policy of importing large numbers of mainland laborers, saying their salaries and benefits were dragged down as a result. They also decried the high inflation and property prices.
A policeman’s warning gunshot helped control the chaotic crowd but it also sent an alarm to the central government, which then ordered the city to resolve its social problems.
Since the incident, Macau has delivered cash and other social benefits to help its citizens bear the economic hardships. But some external crashes continue to brew social and economic storms in the city.
In November 2008, for example, 12,000 workers in Macau lost their jobs as gaming operators halted the construction of their casino projects after Las Vega Sands China (LVS.US), parent of Sands China Ltd. (01928.HK), recorded a 97 percent drop in its share price in the United States from a year ago.
Gaming table cap
The need for Macau to diversify its industry mix has become more urgent. Between 2010 and 2012, the local government capped the total number of gaming tables at 5,500. Only 250 tables were added last year. The government has also set a 3 to 5 percent annual growth in the number of gaming tables for the coming decade.
However, such moves have been unable to push gaming operators to invest in non-gaming facilities. About 90 percent of their revenue still came from gaming while the rest was from retail, entertainment and other non-gaming services.
“The base of gaming revenue is so big that it almost does not matter how fast non-gaming grows, it is always going to be a very small part of the pie,” Grant Govertsen, managing partner at Macau-based Union Gaming Research, told EJ Insight.
One of the main reasons for this inflexibility is that the city’s gaming industry is dominated by junket operators, who run their own VIP gaming rooms for high-rolling gamblers to generate up to 70 percent of the overall revenue in the sector, some analysts said.
Junkets also contribute a lot of revenue for the 18 franchisee casinos, which are usually operated alongside mid-range hotels and have no initiative to offer non-gaming facilities, they said. Of the 35 casinos in the city, the remaining 17 are directly operated by the six license holders.
The government is offered a rare chance to persuade the city’s six gaming license holders to diversify their business mix during the interim review of the licenses in 2015. It could also enhance cooperation with neighboring areas such as Zhuhai, Zhongshan and Nansha to broaden the city’s tourist mix.
Macau is still lagging behind Las Vegas in many ways as the latter’s non-gaming sectors, including retail, entertainment and convention businesses, accounted for 60 percent of the casino operators’ total revenue, an industry expert, who declined to be identified, told EJ Insight.
During the 2015 review, the six license holders will probably be urged to fulfill certain requirements in their investments and space allocation for cultural, convention, sport and retail activities, he said. Also, they may have to achieve a certain ratio of non-gaming revenue to total revenue by 2020 and 2022, when they need to renew their licenses, he said.
In view of the government’s policies and the opening of the Hong Kong-Zhuhai-Macau bridge in 2016, several trends in Macau’s gaming industry will be seen over the next decade, observers said. Franchisee casinos will continue to lose market share while some of them may go bankrupt. Mass-market gaming tables will become dominant in casinos while choices of non-gaming activities will also increase, encouraging visitors to stay longer.
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