INDUSTRY OPINION

Clouds gather for U.S. operators in Macau

Sudhir H. Kalé*

The COVID-19 pandemic has taken a huge toll on casino revenues in Macau with U.S. operators such as Wynn Resorts and Las Vegas Sands bleeding more than $2 million a day in the 2020 second quarter.

To make matters worse, President Trump’s spats with China continue on multiple fronts such as the “China virus”, tariffs, Chinese expansion in the South China Sea and allegations of spying. The latest salvos fired by the Trump administration are the banning of TikTok and prohibiting U.S. citizens and companies from using WeChat in their business dealings.

Over 90 percent of communication that Macau casinos have with their customers in the Mainland is carried out using WeChat. The three U.S. operators in Macau could therefore face a serious competitive disadvantage in marketing to their customers. Long term, all concessions in Macau come up for renewal in 2022, and the actions of the U.S. government could also adversely impact the prospects of concession renewal for the U.S. operators.

As all industry observers no doubt realize, it is not legal to market the casino product in China. Advertising of casinos or even visiting clients with the intent of getting them to gamble in casinos carry stiff penalties—a hard lesson learned by Crown Resorts of Australia in 2016. Consequently, most communication with potential customers in the Mainland on the part of the six casino operators in Macau is conducted through the medium of WeChat. WeChat, better known by its Chinese name “Weixin,” has become the medium of choice for both casino operators and customers. Facebook and Instagram are pretty much banned.

The danger and uncertainty surrounding COVID-19— not to mention the regulations on either side of the Macau-China border—have kept loyal customers away. Also, the Chinese government’s clampdown on online gaming to stop capital outflows is having a negative impact on liquidity in Macau’s VIP sector. Lam Kai Kuong, director of the Macau Junket Association has been quoted as saying, “It (the clampdown) definitely impacts liquidity.” Mr. Lam went on to suggest that the VIP industry may never return to revenue levels from two years ago unless China changes its stance toward VIP gambling in Macau.

Needless to say, casino operators in Macau are not happy with Trump’s executive order on WeChat. Wynn Macau warned that such a ban could “adversely affect our ability to communicate with certain of our customers.” David Sisk, Melco Resort and Entertainment’s COO called the ban a “silly thing” for U.S. president Donald Trump to propose. Mr. Sisk went on to say, “They (casino staff) check up on our customers via WeChat. People send videos, they send voicemails – everything is pretty much done through WeChat. All your social media, everything comes through it. I mean, I think there is no way you’d ever exist without it here.”

Could this confluence of events be the beginning of the end of the munificent business environment the three U.S. operators have basked in for over fifteen years? During this period, each operator has shown deference to policy makers in Macau as well as China and steered clear of any contentious issues. However, the coinciding of a worldwide pandemic and deteriorating Sino-U.S. relations may have contributed to a perfect storm, something the casino operators simply cannot control.

The market potential for Macau does not appear as bright as we have gotten used to. For one, China’s economic growth rate, predicted to be the lowest in 30 years even before the pandemic, may result in less working capital for junkets and less disposable income for players in the “mass” and “premium mass” segments. Second, the Macau casino industry will face increasingly stiff competition from jurisdictions such as the Philippines, Vietnam, and Cambodia where the lower gaming taxes allow for higher player reinvestment. Third, tightening of regulations by Mainland authorities to control the flight of Renminbi will considerably reduce the amount available to Chinese residents for gambling in Macau.

With the business environment in Macau getting tougher, and Japan losing its luster for the main U.S. casino operators, the future will probably not be as rosy as it has been in the past 15 years. Casino concessions come up for renewal in 2022. Some analysts predict that the souring of relations between China and the United States will negatively impact the renewal chances of the three U.S. operators in Macau.

Macau has been a magical success for American casino operators for quite some time, and almost an overnight success at that. Who could forget the opening of Sands Macao on May 18, 2004 on the Macau Peninsula? it cost a “puny” $240 million dollars to build and returned its investment in under 12 months. It would be imprudent to suggest that the next fifteen years will be as fecund for U.S. casino operators in Macau as the first 15 years have been. All indications point toward strong headwinds, with the ban on WeChat being but one nonisolated gust. However, when it comes to pinning down the prospects of U.S. casinos in Macau, whichever side you bet on, it is still a gamble. As the Danish nuclear scientist Neils Bohr famously said, “Prediction is very difficult, especially when the future is concerned”.

*Sudhir H. Kalé, Ph.D., is Founder and Principal of GamePlan Consultants, a boutique consultancy that has advised casino clients on five continents. He has lectured and written extensively on the right reopening strategies for gaming businesses amid COVID-19. You can contact Sudhir at skale@gameplanconsultants.com.