The looming re-tendering process for Macau gaming concessions has emerged as the key risk concern among industry investors globally, including lingering questions over potential concession loss and the addition of a seventh or eighth operator.
Such Macau concerns were outlined in a research note issued by brokerage Bernstein on Thursday following a four-week road trip in which analysts spoke to investors in the US, Europe and Canada. According to Bernstein’s Vitaly Umansky, Kelsey Zhu and Eunice Lee, the five most asked questions by investors all related to Macau and most notably to concession renewal – most notably the potential impact of US-China trade relations and whether new operators may be welcomed into the market.
“Overall, sentiment related to Macau gaming stocks (and their US parent companies) is still on the negative side for most investors we had spoken with,” the analysts state. “The key issue of concern is related more to the China economy and geopolitical uncertainty rather than Macau gaming slowdown. China economic softening and uncertainties surrounding the US/China trade dispute have been key focal areas of discussion.
“Concession renewal became the key risk warranting discussion in most investor meetings. As we reiterate … we do not believe the risk of concession loss is material, but some economic leakage for all six gaming operators in the form of higher taxation, or (lower-ROI type of) non-gaming investment is likely.”
Despite investor concerns, Bernstein said the chances of any of the current six Macau operators losing their gaming licenses are extremely low.
“The result would be quite counter-effective to China’s attempts to open up the country for greater foreign investment and the negative PR surrounding such action would be detrimental,” it said.
“US gaming operators can also choose to shut down the entire gaming infrastructure in Macau (a nuclear option) by shutting down the non-gaming elements of the integrated resorts. The result would be unemployment, a drop in tax revenues and a chaotic environment in the city – something that we do not believe the Macau or the Chinese governments would want.”
Bernstein is also more circumspect in regards to the potential for a seventh or eight operator being welcomed in due to competing interests and pressures to reduce the tax burden on current operators as a result of increased competition. It also poured cold water on suggestions a Chinese company would be front-of-line to be granted any new licenses.
“A seventh or eighth concession will inevitably result in favoritism to a specific party and create the impression that Macau wants outsized growth in the gaming industry,” it said. “We do not believe the Chinese government wants any mainland-Chinese companies to be involved in the gaming industry in Macau. In China, “Huang-du-du” (prostitution, gambling and drugs) are viewed extremely negatively (and investment in such areas by mainland enterprises is forbidden). Beijing specifically came out with guidelines last year that prohibits outbound investment in the gaming industry.”
