Macau ills stretch beyond Covid

Macau casino operators will soon report second quarter earnings. If you’re trying to understand the world’s leading casino hub, ignore them.

Don’t take my word. JP Morgan Asia equity analyst DS Kim writes: “[Second quarter] results will start from late-July, which however wouldn’t move the needle for forecast estimates as market share across operators is highly unpredictable/unimportant at this stage, in our view.”

“During this period, to traders and punters company earnings reports might matter for a day,” Macau Gaming Fund II manager Matthew Ossolinski says. “To forward-looking investors, company earnings reports should be almost irrelevant.”

Despite no locally transmitted cases since March last year, Covid-19 still casts a giant shadow over Macau. Borders remain effectively closed to overseas travelers and even Hong Kong, though mainland Chinese have been able to visit without quarantine since September.

Last month, officials restricted travel due to virus outbreaks in Guangdong province, Macau’s neighbor and its largest feeder market.

June’s relapse reversed revenue and visitor gains during the early May Labor Day Golden Week holiday. However, May numbers that generated enormous optimism showed casino revenue still down 60% from pre-pandemic May 2019.

Back then, mainland China provided two-thirds of visitors and an even greater share of gaming revenue. Since reopening to mainland visitors, Macau’s activity hasn’t approached those levels. 

Macau’s anemic recovery contrasts with the US, where regional casinos and more recently Las Vegas have registered sharp rebounds. Beyond Covid, the times done changed in Macau, and it’s casino operators’ responses, not earnings, that currently bear watching.

Amid President Xi Jinping’s anti-corruption campaign, Macau casino revenue tumbled from nearly US$44bn in 2014 to less than US$29bn in 2015, a 34% dive largely dismissed as collateral damage. But gaming revenue hasn’t sniffed US$40bn since.

In 2019, Beijing overtly declared war on gambling, advocating bans on online casinos targeting Chinese players in Cambodia successfully, in the Philippines and beyond less so, plus reiterating prohibitions on gambling promotion in mainland China. While Macau travel resumed last September, convenient online visa application for mainlanders has not.

Under President Xi, China has escalated outbound money transfer scrutiny. Mainland citizens can’t carry more than US$5,000 in foreign currency out of China, with overseas ATM withdrawals limited to RMB10,000 (US$1,540) daily and RMB100,000 annually.

So mainland VIP gamblers, with expected daily losses from US$80,000 up, largely rely on junket promoters for funds to gamble in Macau. (Casinos can grant credit, but there is no legal means to collect gambling debts in mainland China.) Junkets have curtailed credit, preferring to take player deposits in the mainland then make those funds available in Macau, precisely the sort of financial wizardry Beijing wants halted. Predictably, VIP play has cratered.

Operators now spotlight premium mass play to drive revenue. “Compared to VIP, premium mass is an amorphous term,” 2NT8 Limited managing director Alidad Tash explains, “like millionaire versus rich person.”

“How are premium mass players getting their funds to Macau?” IGamiX Management & Consulting managing partner Ben Lee asks. “The confluence of a gambling crackdown over the mainland with tightened cross border currency controls have impacted both VIP and premium mass as they are essentially the same market.”

Last September, China’s Ministry of Public Security announced a secret “travel blacklist” against destinations that encourage gambling by Chinese citizens. In January, and again last week, officials declared the blacklist had been expanded, though listed destinations remain confidential. 

“The fact that they have not come out to state that Macau is exempt from the anti-gambling edict, coupled with the junkets changing their business models, says it all,” Lee concludes, though others disagree.

“[China’s] leadership knows its population is predisposed to gambling. The leadership wants control, and Macau with its borders, traceability, and scrutiny provides them with a solution,” Ossolinski says.

“China wants the growth contained. It wants VIP contained,” Tash says. “A future with 5% growth year on year is fantastic, keeping with the overall economy.” 

In any case, Macau’s days of explosive gaming expansion are over, economist Ricardo Sui says. “After the industry’s in-depth adjustment from 2014 to 2016, and the Chinese government’s ongoing and unambiguous follow-up measures – especially those introduced in 2020 – to regulate citizens’ gambling activities outside the mainland, a clear message about more limited gaming revenue and greater mainland oversight has been conveyed to all casino operators in Macau, as well as those in East and Southeast Asia.”

That message, plus looming gaming concession expiration in 2022, drives casino operators’ reinvigorated efforts to boost non-gaming appeal and signal virtue. During the pandemic, all six concessionaires continued investing, from Las Vegas Sands subsidiary Sands China’s transformation of Sands Cotai Central into Londoner and SJM’s Cotai entrant Grand Lisboa Palace to MGM’s Awakening Lion residency show and Wynn Palace’s announced expansion.

Siu cites Galaxy Entertainment – investing US$5bn to build out its Cotai plot including a Raffles Hotel, convention center and arena– and Melco Resorts for innovative non-gaming investment. “Melco’s opening of the Water Park at Studio City is a clear example,” Siu, director of University of Macau’s Center for Tourism and Integrated Resort Studies, says.

That attraction is the first fruit of a US$1.4bn expansion of the Cotai resort featuring the world’s highest figure-eight observation wheel. “I believe that Melco will continue its investment in more family-style entertainment facilities.”

Last month, Melco announced a joint venture with Guangzhou developer Agile for a theme park in Zhongshan, Guangdong province, furthering Beijing’s Greater Bay Area initiative to tether Hong Kong and Macau with nearby mainland cities. “Melco’s Zhongshan project cuts right to the chase,” Lee says. “Non-gaming investment does not necessarily have to be in Macau with all its existing limitations. It send the right message and to whom they believe are the real decision makers.”

You won’t find messages like that in earnings reports.

Former US diplomat Muhammad Cohen has covered the casino business in Asia since 2006, most recently for Forbes, Inside Asian Gaming, and wrote Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie.