Inside Asian Gaming

T 5 10 he recent decision by China’s Guang- dong province to restrict its citizens’ visits to Macau has not been officially explained. What is clear is that the news had a nega- tive effect on the share prices of several gam- ing operators with investments in the territory. The travel restrictions were a remind- er—if one were needed—that China is still a potentially volatile destination for foreign direct investment, where sudden, unilateral rule changes can have a dramatic effect on a company’s business prospects. It’s also a re- minder that China’s citizens are an indispens- able element in the commercial success of gaming in Macau. Until 2002, when Stanley Ho’s 40-year casino monopoly ended, visitors from the mainland accounted for only a 20% share of Macau’s gamblers. By 2003, with more Chi- nese tourists travelling to the territory in es- Killing the Chicken The recent crackdown on travel from Guangdong could further fuel the battle in Macau’s VIP gaming sector corted groups, the share of Macau gamblers coming from the People’s Republic had risen to more than 50%. Macau’s mass market casino visitors spend less in volume than VIP customers, but the margins on their revenues are better, av- eraging 35% in 2006. The difficulty is that the mass market is heavily skewed to visitors from Guangdong. They represented around 80% of all main- land visitors in 2006, as there are 110 million people in the province, many living only a few hours’ travelling distance from Macau. If the Guangdong rule changes teach anything, it is that Macau casino operators shouldn’t let up in the battle for VIP rev- enues. Under the Basic Law established prior to the handover by Portugal in 1999, Macau has enough autonomy from Beijing to make a good living from the VIP industry without necessarily depending on mass market cus- tomers from the mainland. VIP operations—particularly those cater- ing for high-rolling Hong Kong and overseas clients—could act as a hedge against the vol- atility of the mainland’s mass market, even at a time when margins are being squeezed by the extra supply of VIP capacity from the likes of Wynn and Galaxy. Last year, VIP margins averaged 15%, according to government sta- tistics, but on current trends, this year’s mar- gins are likely to be lower, though on higher turnover. In the first quarter of this year, turnover of VIP gaming chips at the Sands Macau rose 85% from the equivalent quarter in 2006, to a record US$6.86 billion. The downside was that the commission rate paid to junket agents on chip sales also rose. VIP sector still alive and kicking Despite these challenges – to paraphrase the American writer Mark Twain – the death of Macau’s VIP sector has been much exagger- ated. This was shown when the Macau govern- ment was forced earlier this year to re-state the market share split for 2006. While the total revenue remained the same, at US$7.2 billion, the split shifted dra- matically in favour of the VIP sector. The re- stated figures showed that the mass market share had actually fallen one percent, rather than risen 14% as originally announced. Does this mean investors with exposure to the mass market in Macau should be quaking in their boots? No, but the reality is that across the world the gaming industry is often required to act defensively in response to outside political pressures. This is espe- cially the case in China, where gambling is officially banned on the mainland but toler- ated in Macau. One possible explanation for the travel crackdown is that Guangdong officials are concerned too much cash from the main- land’s richest economy is being spent on gambling. Another is that it’s an attempt to prevent mainland citizens from working ille- gally in Macau on visitor permits, and there- fore a response to the recent violent demon- strations by Macau’s long-term unemployed. Social harmony Issues related to ‘social harmony’ as the Chi- nese government often characterises it, ap- pear to be central to thinking on policy is- sues. The English-language China Daily recent- ly reported the former head of a township in Guangdong had been arrested accused of stealing at least 850 million yuan in public funds. The paper stated: “You might wonder where this huge amount of money has gone? Most of it has gone to Macau,into the casinos there. This is not the first case, and certainly will not be the last.” Corruption is seen by the Chinese gov- ernment as a threat to social harmony and its own credibility at a time of a widening gap be- tween rich and poor. The proverb often quot- ed in China to support the policy of setting an example to the many by punishing the few is ‘killing the chicken to scare the monkeys’. If that means a Macau chicken or two has to die, then the central authorities seem willing to do so. Peace on the streets and the primacy of the party’s leadership is likely to be considered more important than the in- terests of foreign private capital – even of a high profile industry such as gaming. The obvious concern for investors in Macau is the rule changes could slow down growth in casino profits. Macau casino operators told Inside Asian Gaming they had experienced a 10% re- duction in visitors in May—the month the restrictions were first announced—even though most mainlanders would then still have been travelling on permits issued be- fore the changes. Prior to the announcement, there were around 250,000 movements by people across the border between Zhuhai in Guang- dong and Macau every day, according to of- ficial statistics. The new restrictions, as reported in the Chinese language media, include: a limit on the number of times visitors are allowed to visit Macau; an extension of the notice pe- riod required for permit applications from six days to 10 days; the indefinite suspension of business travel permits; an end to the prac- tice of accepting urgent applications; the is- suing of single not double entry permits; and a requirement that Guangdong residents must have a two-month gap between each visit to Macau. Las Vegas Sands Corp (LVS) andWynn,the companies that currently have the biggest exposure of any foreign operators in Macau, registered significant share price falls follow- ing the news. The Associated Press reported New York-listed LVS fell US$1.41 to US$76.38 (1.8%) in an afternoon’s trading, while Wynn fell US$1.91 (2%) to $94.79. MGM Mirage, which has not yet opened its joint venture in Macau with Pansy Ho, fell 4 cents on the day to US$76.72. In mid-June, The Australian newspaper reported Nasdaq-listed shares of Melco PBL Entertainment, the joint venture between Hong Kong’s Melco and Australia’s Publishing and Broadcasting Ltd, had fallen to a record low of US$12.08 partly due to a combination of mixed reviews about its newVIP operation at The Crown Macau at Taipa and the travel controls, making its share price losses aver- age 2% over a month. A spokeswoman for the company re- mained upbeat however. “Crown Macau is built for and dedicated to the VIP and high-rollers market, but the policy is more negative to the mass-market segment. As a result, we believe it will not have a significant impact on us,” she said. “Macau casino operators told Inside Asian Gaming they had experienced a 10% reduction in visitors in May—the month the restrictions were first an- nounced—even though most mainlanders would then still have been travel- ling on permits issued be- fore the changes.“

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