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    China Business
     Dec 13, 2012

Beijing change clouds Macau
By Muhammad Cohen

MACAU - As Beijing goes through its leadership transition, even bigger changes are underway in Macau's gaming and hospitality sector that powers the city's economy. Anti-corruption steps promised at last month's Communist Party Congress will further drive Macau's shift that, if successful, will help align the world's leading casino destination more closely with the vision of local government and Beijing leaders' for its future.

"So long as society is stable then should China worry?" HSBC regional analyst Sean Monaghan asked. "Macau should be allowed to grow so long as there is substantial industry diversification and particularly in the non-gaming area," sources tell him. "Macau must drive family tourism and not just be a


bunch of casinos. This transition takes time but it is happening."

Wells Fargo Securities director of equity research Cameron McKnight said: "Generally speaking, the evolution of Chinese government policy has tended to gradual and somewhat glacial from one administration to the next. We expect the new administration is likely to continue pushing Macau to diversify its economy away from purely gaming and more towards leisure oriented tourism.

"It is possible that the new administration is slightly more forthright in encouraging Macau to reduce its dependence on gamblers from Guangdong province and other parts of the mainland, and develop more diverse and independent revenue sources."

University of Macau gaming industry expert Ricardo Siu observed: "While development of the mass market can be viewed as a consensus of the Macau and Central governments for Macau's future,it remains difficult and still unclear at this stage about what steps would be undertaken to encourage it."

Low ebb
The transition period to Xi Jinping's leadership team is coinciding with the slowest growth in Macau's casino revenue since Beijing restricted access to Macau from mid-2008 to mid-2009. From the middle of this year, Macau's gross gaming revenue (GGR) numbers indicate the mass market revenue is expanding at better than 20%, while revenue from high rollers known as VIPs that accounts for 70% of Macau's total GGR is stagnant.

The problem, in part, is slower economic growth in China. But there's also the matter of rich Chinese trying to lower their profiles during the leadership change amid growing concern over income inequality and corruption.

"Recent political incidents in China and some press coverage are arguably causing wealthy Chinese to avoid conspicuous consumption," McKnight said. "For this reason, the luxury goods companies have [also] seen sales growth slow as some wealthy Chinese are more reluctant to buy expensive gifts in the current environment."

Like many other observers, McKnight complained there's "very little granularity or clarity on the impact of the leadership transition on Macau" in the short and long term. Panelists at the Asian Gaming and Hospitality Congress in Macau late last month shed some light on what's been happening and what's ahead.

"People have switched to premium mass market from VIP," according to Success Universe Group deputy chairman and executive director Hoffman Ma. These players bring from US$12,900 to $516,000 per trip from the mainland, he said. Playing directly with the casino rather than through a VIP junket promoter means they forego credit - gambling debts are not enforceable in Chinese courts, so a casino won't lend to mainland players - and rebates, known locally as commission, of up to 1.5% on their chip purchases.

"A lot of rich people in China care less about commission than staying under the radar, as long as they get the same or better service from the casino," said Ma, also the deputy CEO of Ponte 16 resort, where Success Universe consolidated its VIP business. "It's good to keep a low profile with an anti-corruption drive underway."

In an apparent sign of the times, police detained three employees of junket promoters recently, the Wall Street Journal reported last week. The government has further tightened the screws via the banking system, according to another VIP gaming insider at the Macau conference.

Cash poor
"Chinese VIPs are asset rich but if banks don't allow them to monetize it, then they're facing difficulties," said Tony Tong, director of investment for Tak Chun Finance, part of the Tak Chun Group, which operates VIP rooms in Macau with betting chip sales of $5 billion monthly. Tight bank lending is a two-edged sword for the VIP business, making it harder for players to procure funds for play and lengthening the time it takes for junket lenders to collect their loans to players.

There's hope that the end of the transition period will lead to banks loosening credit, Tong told the conference. However, the golden days of the VIP business as the leading engine of growth in Macau may be over for good, again due to the influence of Beijing.

"The Chinese government has asked Macau to tighten restrictions on money transfer [from the mainland]," Ma says. "If they cut off transfers, the VIP market would die."

VIP play provides a mechanism to move money out of the mainland, according to experts. Junket promoters provide credit to VIPs in Macau, and allow them to repay the loans in the mainland. Win or lose, the money players bet to Macau rarely goes back to China. Among mainland VIPs, that amounts to hundreds of billions of dollars a year evading China's currency controls.

There's widespread suspicion, and some specific cases, of funds obtained through corruption being bet at Macau's VIP tables. Beijing's anti-corruption drive could hit VIP revenue marginally, but it can also chill legitimate VIP activity and provide an excuse to crack down on travel to Macau.

Even split
"I don't think the Chinese government wants to stop the VIP market, but wants to control it," Ma said. "The Chinese government will protect Macau by allowing more visitors" to expand the mass market. "Beijing wants to the growth of Macau's gaming revenue to follow the growth of Chinese GDP." Eventually, he forecast, Macau's gaming revenue will be split 50-50 between VIP and mass market play.

In effect, Ma believes mainland authorities want to continue and broaden what's been happening from the middle of this year, with more mass market play, and more tables moved to the mass market main gaming from the VIP rooms, since Macau's table cap bars casinos from adding new tables until next year and limits table count growth to 3% annually.

The move to the mass market carries the added benefit of supporting the non-gaming attractions that operators have tacked on to casinos. Mass market players generally pay for their own rooms, meals and entertainment. Shopping is also moving to accommodate the shift, with more mid-level and entry-level luxury brands at casino resort malls. Even with flat revenue, casinos can grow profits with more mass market plays, since they don't split the gaming table profits with junket promoters.

But there's another side to the rosy scenario. China's economy as well as its leadership is in the midst of a major transition, and Western economies are still stuck in their low-growth rut. Meanwhile, all six of Macau's gaming operators are committed to spend upwards of US$15 billion collectively to build new resorts to broaden Macau's appeal as the leisure and travel destination Beijing wants, rather than a gambling center.

With that in mind, the central government will likely limit any moves that hit Macau casinos, which still rely on VIPs for more than two-thirds of revenue. "Owing to the economic uncertainties in the global and mainland markets, ensuring the revenue of Macau's casinos seems important in the coming few years," University of Macau's Ricardo Siu said.

In other words, Beijing's steps to limit Macau casino play may be more for show and not for dough.

Macau Business 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, high finance, and cheap lingerie. Find his blog, online archive and more at www.MuhammadCohen.com, and follow him on Facebook and Twitter @MuhammadCohen.

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