MACAU

The year the game changed

Macau’s gaming industry is now heading towards “healthy and sustainable” development, the government said, after a tumultuous few months that have led to the virtual collapse of the junket agents and the VIP business they were instrumental in building.

After decades of seemingly turning a blind eye to the junkets’ activities and their role in helping high rollers to bring capital out of China, everything changed with the arrest of Suncity CEO Alvin Chau, according to panellists on a recent Asia Gaming Brief webinar.

His indictment on charges of arranging illegal gambling and money laundering led to the almost immediate suspension of all of its VIP gaming rooms in Macau. Other junkets are expected to follow as operators end their partnerships.

This will result in an immediate 30 to 50 percent drop in VIP revenue, according to analysts at J.P. Morgan. However, the impact on their bottom line is far less significant given the low margins in the VIP business.

It’s a different story for the government, however, which derives its taxation base from gross gambling revenue, of which VIP still makes up about a third of the market.

There is also likely to be a knock on effect on all the high-end services, such as restaurants and retail that cater to the high rollers, forcing a significant economic readjustment.

While saying the future of Macau gaming will be more sustainable, Secretary for Economy and Finance Lei Wai Nong, concedes that unemployment will rise from the current 3.8 percent as junkets close.

The fact that Macau authorities were prepared to wield the axe over a segment that makes up such a large chunk of its revenue shows that paying lip service to economic diversification was no longer an option. It also appears to have put pay to the view that China’s ongoing crackdown on capital outflows and its targeting of key industries as part of its “common prosperity” drive wouldn’t affect Macau.

“This is a significant change,” Steve Vickers,

head of risk consultancy Steve Vickers & Co. said on the webinar. “It’s not just about junkets and whether we describe them as premium mass etc, it has gone beyond that. This is a very significant difference, and I think the government will push very hard to try and turn Macau into something different than it is at the moment. But that will be a very painful exercise and it brings up pretty scary issues for the current concessionaires.”

I think the government will push very hard to try and turn Macau into something different than it is at the moment.

Investors in Macau’s gaming stocks already had frayed nerves as they tried to assess the likely impact of China’s actions on its technology giants and other areas of the economy, pushing the ‘too big to fail’ mantra to the limit.

The publication of amendments to Macau’s gaming law in mid-September sent them over the edge, triggering a record drop in the share prices as investors took fright at proposals that may restrict the distribution of capital to shareholders amongst other items.

The draft law contained very few details and although analysts are now more confident that the government will take a pragmatic view on concession renewals, there remains a high degree of uncertainty.

Macau is proposing a shorter concession period than the 20 years on offer in the first round, as well as likely mandating more investment in non-gaming activities. At the same time the recovery from Covid has been at a snails’ pace due to China’s adherence to a zero-Covid policy, with no change expected in the short term.

Panellists on the webinar all agreed that everything has now changed in Macau, although what the future will look like is another matter. One of the key questions to answer will be what happens to the premium mass business and how Macau will be able to overcome the $50,000 annual cap on bringing money out of China.

Given Beijing’s concerted efforts to clamp down on the estimated $150 billion that leaves its borders each year for gambling, it’s difficult to expect it not to also stamp out other methods used by players to raise funds for gambling, such as multiple Union Pay debit cards and local pawn shops.

“I genuinely believe that China is flexing its muscles, it hasn’t put the axe down, there’s going to be more blood and it will definitely be affecting the China UnionPay, it will definitely be affecting the jewellery shops and the digital currency,” said Alidad Tash, managing director of 2NT8, referring to the potential introduction of a digital RMB in Macau.

Although such a move would create considerable short-term headaches, especially for the U.S. operators who need to bring funds out of Macau, it may ultimately be the one bright spark in an otherwise fairly bleak outlook.

A digital currency would make capital flows far more transparent, which may make Beijing more comfortable. It would also potentially fully open Macau to China’s mass market.

Regulatory uncertainty affecting ratings outlook: Fitch

Las Vegas Sands and SJM Holdings have been placed on Rating Watch Negative, while MGM China will also retain that status, due to the uncertainty in Macau ahead of next year’s concession re-tendering process, Fitch Ratings said.

The Ratings Watch Negative also affects Las Vegas Sands’s Marina Bay Sands unit in Singapore and its Sands China business. The firm said the ratings actions reflect the more imminent regulatory risk relating to the concessions, which are set to expire in June of next year.

“Near-term credit risk has increased with limited visibility into the re-bidding procedures, how the future regulatory and operating environment will impact cash flows and leverage, and the likelihood and consequences of incumbent operators’ ability to secure a new gaming concession,” it said.

Fitch said it believes the likelihood of the current concessionaires failing to obtain a new license is low, but should not be ignored.

Wynn a special situations opportunity with “saleable” assets

CBRE Securities has resumed coverage on global gaming stocks, saying it favours Wynn Resorts as a unique contrarian play and a potential special situations opportunity should it put its Macau assets up for sale.

The operator is seen as the most exposed to Macau’s battered VIP market, but CBRE said its assets in the city are among the best and will be repositioned to be extremely competitive in the mass and premium mass market. The operator has the Wynn Macau resort on the peninsula and Wynn Palace on Cotai. The stock has been penalized for its perceived exposure to VIP, however, assuming it won’t be able to compete in the mass market is flawed thinking, the report notes.

The report said that Wynn has ways of creating value outside of Macau, but “if that doesn’t work, we believe the highly coveted Wynn assets could finally be saleable with a complete changing of the guard following the departure of outgoing CEO Matt Maddox.”