Macau
casinos face a difficult
decade By Muhammad Cohen
MACAU - In the game of craps, you can bet
that a roll of the dice will add up to 10. You can
bet 10 in any combination - the easy 10 - or you
can bet for a pair of fives - the hard 10.
This year marks the 10th anniversary of
Macau's casino liberalization. It's been a great
decade for the city, which has catapulted from
being an obscure footnote in history to the
overwhelming revenue leader of the global gaming
industry.
For Macau's casino operators,
it's been the easy 10, and they've won big,
booking profits in the billions of dollars. They
now face a hard 10 in the decade ahead, a bet with
much longer odds for success.
The 10-year
mark is the half-way way point in the 20-year
gaming license terms for four of the six casino
operators. The license
agreements governing
Sands China, Wynn Macau, Galaxy Entertainment
Group and Melco Crown Entertainment were signed in
late June 2002 and expire on the anniversary date
in 2022.
The licenses for the other two
license holders, Stanley Ho's Sociedade de Jogos
de Macau [SJM] and the MGM China/Pansy Ho
partnership expire in March 2020, based on Stanley
Ho's previous license expiry date.
Happy regulator Manuel Joaquim
das Neves, the head of Macau's Gaming Inspection
and Coordination Bureau (DICJ by its Portuguese
acronym), told Macau Business that the end of the
gaming monopoly has been beneficial to Macau,
where casino revenue is now five times greater
than the Las Vegas Strip.
"The entry of
new players has brought huge amounts of
investment, better offerings and non-gaming
diversification," Neves told the magazine. For
those reasons, Neves said he expects all six
licensees to be granted extensions.
Casino
operators and the overwhelming majority of
investment analysts treat license renewal as a
routine matter, a mere technicality. But until the
licensees get those extensions - and Neves hardly
has the final word on this matter - the casino
operators are in a very delicate position.
On the one hand, they have to continue to
expand, both for competitive reasons and to show
faith in the Macau government. But they also have
to accede to a growing list of government demands
that erode their profitability, which remains
centered almost entirely on gambling, specifically
high roller baccarat.
Now more than ever,
they can't say no to the government, even though
by 2022, Macau Chief Executive Fernando Chui
Sai-on will be out of office and China will likely
be in the midst of another leadership change
similar to this year's spectacle.
The
government can also insist on more conditions for
license renewals, whether it's even more
non-gaming attractions, plus higher payments and
fees. Macau is less likely to raise taxes, at
present nearly 40%. (Nevada taxes gaming revenue
at 6.75%, Singapore at 12.5% for high rollers and
22.5% for mass market players). The government is
in the driver's seat, where it's still getting a
feel for the road ahead.
Vegas stays in
Vegas Just after the 1999 handover by
Portugal of Macau to China, when the government
began considering ending Stanley Ho's decades-old
monopoly, Las Vegas shrugged. Even among casino
industry executives, Macau had little appeal.
Along with Portuguese historical remnants and
food, prostitution, smuggling and funny money
deals were Macau's primary non-gaming attractions.
When Macau tendered three gaming licenses
in late 2001, few A-list Las Vegas operators were
willing to invest there. Harrah's, the largest
casino operator at the time, declined to bid. MGM
Mirage, then the biggest name on the Strip, agreed
to run a casino, but only if the Hong Kong
conglomerate New World paid for the project.
Las Vegas Sands, the parent company of
Sands China with at the time just one casino on
the Strip, took the same approach, partnering
first with a Taiwan bank and then with Galaxy, at
the time mainly known for its Hong Kong listed
construction and building supplies company K-Wah
International. The break-up of the Sands-Galaxy
partnership in late 2002 led the government to
double the license count from three to six.
In part, the Las Vegas companies were
afraid that their home regulators back in the US
state of Nevada would look unfavorably toward
Macau's (still) evolving casino rules. They were
unwilling to risk their licenses in Las Vegas, the
undisputed capital of the gaming world, for the
uncertain prospects of Macau.
Wynn
showplace Steve Wynn built Mirage, Treasure
Island and Bellagio, Strip landmarks that
transformed Las Vegas into a luxury destination.
But in 2001 he'd just been bought out by MGM and
didn't have a casino to call his own. So he was
available, had a few hundred million dollars in
his pocket, and liked the idea of trying something
new.
For its part, Macau was thrilled to
have such a big name from Las Vegas bring his
brand of glamour to their little town of less than
half a million people. When it opened in 2006, the
US$1 billion Wynn Macau delivered.
Macau's
first Las Vegas-style resort was monumental, with
its curved profile bringing new style to the
burgeoning skyline. It was luxurious, with genuine
artworks and lavish appointments. It had pizzazz
with its spectacular fountains outside and its
Tree of Prosperity display inside. It was light
years ahead of Stanley Ho's signature Casino
Lisboa, with its smoky, dark gambling dens and
hookers patrolling the basement.
But Wynn
Macau was still just a spruced up version of
Lisboa. It was a casino hotel with a few shops and
places to eat. It didn't have any shows - at least
Lisboa boasted the risque Crazy Paris revue - it
didn't have a convention center, or a museum. At
least it was better than Sands Macao, which opened
two years earlier as a stand-alone casino with a
just few dozen suites for so-called VIPs.
Back then, the Macau government was
delighted to have the jobs - unemployment was over
7.1% in 2000 when casino liberalization was
hatched - foreign investment, and international
affirmation the new casinos brought. It was in no
position to ask for anything more.
Place to be Today, with the US
growing slowly and uncertainly and Europe in the
dumps, Macau is driving global gaming growth.
Moreover, all six casino operators desperately
want something from Macau: permission to build
more, despite the uncertainties of license
renewal. Specifically, they want to build in
Cotai, which Las Vegas Sands promoted as Macau's
version of the Vegas Strip on landfill connecting
the outer islands of Coloane and Taipa.
Wynn Macau - the Hong Kong-listed
subsidiary of Wall Street's Wynn Resorts - has
just been granted approval to build a $4 billion
resort in Cotai. With a projected completion date
of 2015, Wynn Cotai will need to book $600 million
a year in profits just to get its money back
before its license expires. That's not impossible,
but the company and its investors are counting on
having another 20 years to enjoy the fruits of
Steve Wynn's legendary casino resort
craftsmanship.
The new Wynn will include a
convention center, a lake, about 40 shopping
outlets, and a 1,750 seat theater in a market
where Cirque du Soleil closed after a
four-and-half year red-ink run at Venetian Macao.
It's unlikely that any of the non-gaming amenities
will contribute much to Wynn's bottom line, but
the government insists on them in the name of
economic diversification. Currently, more than 90%
of Macau casino resorts' revenue still comes from
casinos.
Even with the uncertainties of
the licensing situation and the demands for more
low-yield amenities, Galaxy has already begun the
HK$16 billion (US$2.1 billion) phase two of its
Cotai resort, including a 200 store retail mall
and an extension of its rooftop beach. SJM, Melco
Crown, Sands China, and MGM China are all waiting
in line for the official nod for the own
multi-billion dollar Cotai properties.
With four resorts now open, including the
iconic Venetian Macao and Asian-targeted Galaxy,
Cotai has become the destination of choice of mass
market players. Increasingly, casinos have to be
there or be square.
Slower
growth Casino operators are anxious to
begin building even in the face of slowing growth.
Last year, gaming revenue jumped 42.2% to 267.9
billion Macau patacas (US$33.5 billion). This
year's growth had been running at just over half
the 2011 rate, before a severe slowdown in May,
perhaps to single digits. Analysts are putting the
blame on the uncertain economic outlook for China.
The mainland still provides the majority
of Macau's visitors and an even bigger share of
revenue, despite the promises of liberalization to
turn Macau into an international destination.
Perhaps most troubling for operators, the
opening of Sands Cotai Central in April has failed
to boost tourism numbers or juice revenue as
previous casino openings have done.
Meanwhile, the success of Macau has led to
the construction of the world's two most expensive
casino resorts in Singapore, international
operators building billion dollar resorts in the
Philippines and Vietnam, and even a formidable
(Hong Kong-listed) contender in Cambodia. South
Korea, Japan and Taiwan are all looking to bring
in pros from Vegas (or Singapore or Macau) to get
a piece of the action.
Facing billions in
construction costs, a government edict to add less
profitable non-gaming space, slowing growth,
rising regional competition, and the ticking time
bomb of license expiration, Macau operators have
to bet the hard 10 for the decade ahead. All they
can do is hope the dice go their way.
Macau Business magazine special
correspondent and former broadcast news producer
Muhammad Cohen told America's story to the
world as a US diplomat and is author of Hong
Kong On Air, a novel set during the 1997
handover about television news, love, betrayal,
financial crisis, and cheap lingerie. See his blog
and more at MuhammadCohen.com.
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