As gaming concessions approach expiration, Macau and Beijing hold all the cards
Assuming Macau’s six current licensed operators will have their concessions automatically renewed ignores the history of gaming liberalization in the city and the current state of play in the world’s casino capital. Even though Secretary for Economy and Finance Lionel Leong listed “renewal of the gaming licenses” among key priorities for the government, Macau can do whatever it wants about casino concessions, which expire beginning in 2020, including reducing or increasing the number of operators.
“I suspect even in Macau and the Central Government they don’t know [what they’ll do]. I think there are some preferences that are tempered by political or economic reality,” Spectrum Asia CEO Paul Bromberg, an expert in gaming regulation, says. “Seven years is an eternity in politics, a long time in the gaming industry.”
Conditions have certainly changed since Macau opened the bidding for three concessions in late 2001 to end Stanley Ho’s 40 year casino monopoly. Back then, Macau had gaming revenue of $2 billion, roughly half of Atlantic City’s take, compared with last year’s $43.9 billion, nearly seven times the win in Las Vegas thanks to the investment of some $20 billon (and counting) in new casino facilities, including landmark integrated resorts. The city, in 2001 still recovering from the 1997 Asian economic crisis, achieved some of the world’s most stunning economic growth for a decade, creating virtual full employment and huge fiscal surpluses.
RASING THE BAROMETER
Despite all that progress, concession expiration approaches in an atmosphere that’s far less forgiving than it was 11 years ago when Macau celebrated the opening of its first non-monopoly casino, Sands Macao. Local authorities feel increased pressures from Beijing, frustrated by what is sees as Macau’s failure to implement what it believes are mutually agreed upon policies for greater oversight of the gaming industry and broadening Macau’s tourist appeal. It’s also a moment when gaming revenue, 83% of Macau’s government revenue in the first half of this year, continues to decline, and Macau faces increased regional competition.
Although the current government aims to handle the concession expiration issue, Chief Executive Fernando Chui will leave office in December 2019, fours months before the first expirations, Beijing is likely to be more involved in both the selection of Mr Chui’s successor and the concession issue. Even if the current six operators are granted renewals, terms could be different and even unequal, according to experts in Macau and beyond, some of whom asked to comment anonymously.
Gaming concessions expire in 2020 for SJM Holdings and MGM China and in 2022 for Galaxy Entertainment, Wynn Macau, Melco Crown and Sands China. The Macau government says it plans to begin talks on concessions with operators next year. Upon taking office last December in the revamped cabinet for Chief Executive Fernando Chui’s second five year term, Mr Leong said the government would assess operators’ performance in gaming along with their contribution to economic diversification through non-gaming offerings.
Following the December 1999 departure of Portugal’s colonial administration, Macau’s first Chief Executive Edmund Ho proposed ending the casino monopoly of Sociedade de Turismo de Diversoes de Macau (STDM) and offering new concessions. Mr Ho’s stated goal was to make Macau a more diverse tourist destination. Concession expiry offers a chance to put teeth into that goal.
“The government’s aim has been a market where gaming is one of several attractions, much like a cruise ship,” Wells Fargo Securities Senior Analyst Cameron McKnight says. “We think those licensees who have contributed the most to diversification, and invested in Macau’s future, are likely to be viewed most favorably. In practical terms, we don’t know what that means, whether it’s the allocation of gaming tables or development land, or different terms on which licenses are renewed.” He notes that the authorities’ enthusiasm for non-gaming investment extends to neighboring Hengqin island in Guangdong Province, a joint development zone envisioned to complement and support land-short Macau.
Experts say it’s too early to speculate about what conditions might be attached to new concessions. Increased tax or investment requirements beyond gaming could be added and concession length shortened from the current 20 years. “Shorter licenses could impede the inevitable property reinvestment that will be needed over the 2025-2030 period, at which point the Sands Macao will be 20- plus years old, Wynn Macau 20 years old and Sands Cotai Central 13 years old,” Mr McKnight, who is based in New York and visits Macau regularly, warns. “One thing that we’ve learned in the US from the experience of Atlantic City and other destination markets is that reinvestment in the physical properties and keeping amenities fresh and current is absolutely critical to competing effectively.”
Macau stumbled into having six operators, and the number could change. In February 2002, the government granted concessions to three operators, STDM’s successor SJM Holdings, Wynn and a partnership of Galaxy and Las Vegas Sands, Sands China’s parent company. Galaxy and LVS couldn’t agree on partnership terms, leaving Macau’s policymakers in a quandary. Government lawyer Jorge Oliveira, who became Macau’s point man on gaming liberalization, says he proposed granting a subconcession, in effect giving both Galaxy and LVS permission to operate casinos independently. The government eventually decided that the other concessions also had subconcessions. SJM sold its subconcession to a partnership of MGM and Pansy Ho for $200 million. Wynn sold its subconcession to Melco Crown for $900 million.
Six has proven a lucky number for Macau. “Six operators allows for an appropriate mix of healthy competition but sufficient returns to encourage long term investment,” Mr McKnight says. “Competition from six licensees prevents one or two of the licensees becoming too dominant and dictating terms to the government.”
The subconcession status of otherwise full-fledged operators remains an anomaly that expiration provides an opportunity to correct. “I have for years contended that subconcessions should disappear and become concessions,” Macau gaming law expert Jorge Godinho says. “More concessionaires could be added, especially by upgrading to concessionaire status some current operators who are not concession holders.” That could include owners of satellite casinos that operate under license from SJM and Galaxy.
Granting new concessions to those satellite casino operators could meet demands in Macau for a so-called “local champion.” Mr McKnight considers the notion of additional concessions “highly speculative,” but notes, “Over the past three years, several of our industry contacts have suggested the possibility of a ‘local licensee’ or a license owned by Macau citizens and/or employees.”
Candidates for an upgrade to concessionaire status include Macau Legend, headed by former Macau legislator David Chow— his wife Melinda Chan now sits in the Legislative Assembly—which operates casinos at its Landmark Hotel and Fisherman’s Wharf complex; Paradise Entertainment, affiliated with Jay Chun’s LT Game, running casinos at the Macau Jockey Club, Hotel Waldo and Kam Pek Paradise; and junket promoter Jimei, which operates the casino at Grand Lapa Hotel as well as VIP rooms.
If there is a chance for additional casino concessions for new operators, despite Macau’s 14 straight months of declining gaming revenue, “this could generate quite a beauty contest,” Mr Godinho, a visiting professor of gaming law and anti-money laundering at University of Macau, says. “There’d be no problem finding interested parties or capital. Macau has certainly proven itself and passed the ‘proof of concept’ stage,” Mr McKnight says. “In our view, there isn’t another gaming market in the world with the same potential long-term penetration and growth as Macau and China. Once market growth stabilizes, we believe there’s a case for long-term annual revenue growth of around 10%.” Potential new concessionaires may find the biggest limit isn’t the market but the availability of developable land.
President Xi Jinping’s anti-corruption campaign may not have targeted Macau, but it’s proven a powerful reminder of Beijing’s power over the city. On his visit to Macau in December, Mr Xi said Mr Chui’s government needs to improve its performance in his second term. Sources suggest Beijing has been disappointed with Macau’s execution of presumably mutual policies such as keeping gaming revenue expansion roughly in line with mainland economic growth, asserting more control over junkets, diversifying the economy, improving local infrastructure and avoiding social instability. If Macau can’t fix things, Beijing feels it must.
“China is going to have a much stronger say in what happens in Macau, including the concessions,” a source says. “The problem is they don’t understand the place or the gaming industry.” That throws another wild card into Macau’s concession expiry deck.
Editor at large Muhammad Cohen also blogs for Forbes on gaming throughout Asia and wrote Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie.