Meet the new rules, same as the old rules

Sighs of relief greet the proposed second generation of casino concessions in Macao. By David McKee

fter much dropping of hints by City Hall

Aand considerable fretful speculation on Wall Street, Macao’s government laid out its new regime for casino concessions in the enclave. They strongly resemble the status quo, leading to a palpable sense of relief across the financial world. Although the length of concessions will be halved—from 20 years to 10, with optional three-year renewals under exigent circumstances—six licenses will be maintained, with the sub-concession tier scrapped and all six operators given parity.

Deutsche Bank analyst Carlo Santarelli called it “a decidedly favorable event, even if logically expected.” Added analysts for Jefferies Global Gaming, “There were few surprises in the bill, which we consider benign, therefore removing a major overhang and providing incremental support for valuations.”

“While there is little change to the current structure other than the shortened term, we noted the market sentiment was highly negative initially and was expecting drastic change. This development … should be a positive for valuations,” wrote Jefferies analysts.

The current licensees aren’t completely out of the woods, as the June retendering process still awaits, meaning that one or more could get kicked out of town, although most financial analysts think this highly unlikely. As though aware of their precarious status, all six operators quickly lined up to serenade

the government with praise for its sagacity. Warbled Galaxy Entertainment Chairman Lui Che Woo, “We believe that having optimized laws and regulations in place will lay a solid foundation for the city’s steady development and propel the synergetic development of the gaming industry, leading to Macao’s overall economic resilience and diversity.”

Wall Street reacted positively. Shares of Las Vegas Sands, MGM Resorts International, Melco Resorts & Entertainment, and Wynn Resorts all rose as soon as the news broke.

The Macanese government resisted the temptation to raise taxes, which will continue to be imposed at 39 percent. It also reneged on a threat to appoint government overseers for every casino. And it backed down from the notion of requiring official approval of dividend payments, an idea that polled poorly with the Macao citizenry. Even the junket industry, under a cloud since the arrest of Suncity Group boss Alvin Chau, saw a glimmer of light. Junketeers can continue to operate but they will have to pledge their fealty to one operator apiece.

Not everyone rejoiced. Some speculated that the 10-year terms would inhibit significant investment—a priority for the Macanese regime. And given chilly relations between the United States and China, others feared retaliation. A Steve Vickers Associates analysis fretted, “The primary factor which the Chinese and Macau authorities consider when evaluating concession renewals and new regulations is clearly the national security criteria and whether, for example, capital flight can be contained, especially when linked to US operators seeking to repatriate dividends.”

“Too soon to celebrate,” declared gaming-law expert (and University of Macau faculty member) I. Nelson Rose, although he ceded that it would be legally difficult for Macao to throw out any of the current concessionaires. (In the extreme instance of nationalization, casino companies would be kicked out sans any form of compensation.) Also, how much will casino operators have to pay for the formality of having their concessions renewed? The flip side of that coin is that when Stanley Ho’s concession expired in 2001, it only cost him $9.5 million to get it back.

A more nebulous financial burden is a new requirement to lavish money on projects of an “educational, scientific and technological nature, environmental protection, culture, and sports.” Writes Rose, “My guess is this means giving hundreds of millions of dollars to the University of Macau and

other schools, spending massive amounts on mass transit and building arenas and soccer stadiums.”

There were some modest tweaks to the present arrangement in the bill, which now proceeds to the Macanese legislature for its rubber-stamp. For one, a local managing director, who must be a resident of Macao, can have no less than a 15 percent ownership stake, up from 10 percent. Also, according to Santarelli, “The Council is proposing approval be required for major financial decisions, thereby leaving the language somewhat ambiguous.”

The fine print that does appear worrisome for operators is a clause requiring minimum amounts of gross gaming revenue per gaming position. If these thresholds are not met, casinos will have to pay the difference out of their own pockets in Year One. If the shortfalls continue for a second year, the city’s chief executive can unilaterally reduce the number of slots and tables at the casino in question. The exact formula remains sketchy. But “This will be a real potential deal breaker for concessionaires, depending upon what that mandated minimum GGR number is,” former governmental advisor David Green told Inside Asian Gaming.

For the time, casino operators in Macao have plenty about which to worry. Aside from having to reinvent the junket business around premium mass-market players instead of nearly extinct VIP customers, they have to continue to play a waiting game with Peking regarding the resumption of wide-open visitation. China’s zero-tolerance policy toward Covid-19 should inhibit Macanese visitation for months to come and Chinese New Year is already a write-off. While concessionaires may have to pay more this time for their casino licenses, they’re arguably not worth what they used to be.