MACAU

Investors/operators anxious for detail on Macau gaming laws

Investors and operators are seeking further clarity from the Macau government over draft proposals that seek to increase supervision over the gaming industry.

In September, the administration published its long-awaited amendments to Macau’s gaming law. The document puts forward nine key points where changes are likely, but provides very little in detail as to what the suggestions will mean in practice.

In the absence of clarity, investors fled for the exits. The day after publication, panic selling wiped almost $20 billion off the value of shares in Macau’s six gaming operators.

Investors feared that the proposals represent efforts by China to gain tighter control over gaming in Macau, which may face the same kind of draconian restrictions that have been imposed on other industries in China in recent months.

Analysts have said sentiment towards the sector remains poor and that’s unlikely to change until the government provides further detail as to its intentions.

The two biggest areas of concern appear to be a proposal to increase operational oversight of the companies. Some analysts have suggested that this may involve putting a government member on the board of directors of the operators.

This would give them greater clarity into areas of operations, such as marketing activities, raising concern it may add a further drag on the already limited potential to target clients in China. The operators are only able to promote their non-gaming activities on the Mainland.

The draft amendments, which are out for public consultation until Oct. 29, also hint that there may be restrictions on the distribution of dividends.

This may range from seeking prior permission before announcing payouts to shareholders through to limits on what can be distributed. The government appears to be trying to ensure that capital is returned to Macau for further investment in the gaming industry.

The gaming sub-concessions will also be jettisoned under the draft proposals. This was expected and most analysts expect the three sub-concessionaires to be given a full concession license in the re-tendering process.

SJM Holdings, Wynn Resorts and Galaxy Entertainment were awarded the original concessions, while Sands China, MGM China and Melco Resorts & Entertainment are operating as sub-concessions of the other three.

The long-term bull thesis remains intact, even if exact timing is still uncertain.

The government didn’t explicitly state how many concessions will be allowed in the retender, but did say that one of its key considerations will be ensuring an appropriate scale for the industry.

Under China’s prodding, Macau has been seeking to diversify its economy, but it still gets about 80 percent of its revenue from the six operators. Therefore most observers believe that it will not reduce the number of licenses it hands out.

However, this is by no means certain and some have argued that the wording of the government leaves room for interpretation that the number could be reduced.

Most of the other proposals were expected. It wants to see tighter supervision of the junket industry and more investment in non-gaming amenities. The operators are also expected to step up efforts to promote locals and to support small-to-medium sizedbusinesses in the territory.

Many analysts have downgraded their forecasts for Macau and its gaming operators in the wake of the publication of the draft law. However, most say that the reason behind the re-rating has been more related to the slow pace of recovery than concern over China.

“The long-term bull thesis remains intact, even if exact timing is still uncertain,” Bernstein Research wrote in a recent note, saying the selloff had been overdone.

The firm expects 2021 gross gambling revenue to reach 34 percent of its 2019 levels, with mass at 41 percent and VIP at 25 percent of the prior amounts.

Bernstein notes that the companies are still profitable at the EBITDA level with GGR at 30 percent of where it was in 2019.

It is now expecting GGR to top 2019 in 2023 and then to achieve low double-digit growth going forward, led by mass and premium mass. It said that the “long-term structural recovery trumps delay and uncertainty” with the stocks now offering an “attractive risk-reward” profile after the recent selloff.

JP Morgan is not so certain and said there is “no point in fighting the policy” direction for the Macau market. Further clarity on what the government intends is needed before making investment decisions.

Wynn Macau lenders agree $1.5b financing

Wynn Macau said lenders have agreed to a $1.5 billion revolving credit facility, which will be used to refinance existing debt and for general corporate purposes.

The facility will consist of one tranche of $312.5 million and one of HK$9.26 billion. The funds will be made available to Wynn’s WM Cayman II unit, which also has the ability to upsize the loan by a further $1 billion. The final maturity of all outstanding loans under the Revolving Facility is 16 September 2025.

Each loan under the Revolving Facility, consisting of both United States dollar and Hong Kong dollar tranches, will bear interest at LIBOR or HIBOR, as applicable, plus a margin of 1.875 percent to 2.875 percent per annum based on the leverage ratio of WM Cayman II on a consolidated basis.

AGTech Holdings to buy Macau Pass owner for $100m

AGTech Holdings, a Chinese lottery supplier, said it has agreed to buy the owner of Macau Pass for a maximum of HK778 million ($100 million) to diversify its revenue streams.

Hong Kong-listed AGTech is buying the entire capital of Macau Pass Holdings Ltd, which owns 99 percent of Macau Pass. It’s also buying the remaining 1 percent in the target company. Macau Pass provides services that enable retailers and other merchants to accept different payment methods from other payment service providers, such as the Alipay e-wallet, so customers can choose their preferred payment methods at checkout.

Macau Pass receives commission income from the merchants for processing the payment.

Law changes trigger stock exodus, but should it have been a surprise?

Signs China is tightening its grip on the gaming industry in Macau triggered a record sell off in the big six operator stocks, although leading gaming industry consultant, Ben Lee, said the latest edict shouldn’t have come as such a surprise.

The Macau government’s draft legislation for the gaming industry includes proposals that will tighten government supervision over the companies at the operating level, potentially impose restrictions on dividend distributions and increase local share ownership.

The law will also do away with subconcessions and will likely reduce the maturity of the gaming licenses, which currently stand at 20 years with the possibility of a five-year extension.

Investors voted with a stampede for the exits. According to Bloomberg data, Macau’s operators lost a combined $18.4 billion from their market value, which was a record. The Bloomberg Intelligence Index of the six companies also fell a record 23 percent, with the three U.S. operators being the hardest hit.

Lee, who is a 16-year Macau resident and managing partner of iGamiX Management & Consulting, said investors had been lulled into a false sense of security.

“They had become too comfortable with the scenario that the government would not touch an industry as large as Macau’s gaming industry,” he said.

“There is nothing too big for China to touch.” In recent months, Beijing has turned its attention to sectors from private education, to gaming and food delivery under its “Common Prosperity Plan,” designed to close the country’s wealth gap. Its initiatives have wiped trillions from the value of Chinese stocks and lead to fundamental debate amongst Western investors as to how to view and value the country’s markets.

There is nothing too big for China to touch.

Billionaire investor George Soros recently wrote in a Wall Street Journal op-ed that “the regime regards all Chinese companies as instruments of the one-party state” and this “does not augur well for investors.”

Macau’s draft gaming bill contains little detail or explanation on some of the points that have raised concern. Deutsche Bank points out that at present the only certainty is uncertainty.

However, Lee says there is enough evidence for investors to be wary. The government has stressed the importance of creating an industry of a suitable and sustainable scale, but it gives no guidance as to what that scale should be.

Macau hit a record level of gross gambling revenue of $45 billion in 2013 before dropping off following China’s anti-corruption campaigns and scandals involving junket operators. By 2019, it had returned to GGR of $37 billion, but Lee said this level may be above Beijing’s comfort levels for gambling revenue.

“We saw a series of responses by the Mainland in terms of anti-gambling edicts and the blacklists. This latest move should be no surprise for people who are expecting moves by China to control the industry.”