Pivotal “one China” speech seen as a warning
In a brief but potentially game-changing visit to Macau last month, Chinese President Xi Jinping indicated that oversight of the island’s once-booming casino industry could increase, and the gaming mecca should prepare to develop other revenue sources.
Last year the Chinese government cracked down on money laundering in an effort to keep money from illegally exiting the Mainland, which has seen an economic slump. As part of the effort, the government gave China’s Economic Crimes Investigation Bureau access to transactions made with state-backed UnionPay credit cards, according to the South China Morning Post.
The discouraging effect on once-freewheeling high rollers has already extracted billions in revenue from the gaming enclave. The island lost a combined $58 billion in market value in just six months in 2014, according to Reuters.
In a two-day visit in December to celebrate the 1999 handover of Macau from Portugal, Xi warned government officials to be mindful of the proverb, “Be prepared before the rainy days come.”
“Our sage said that, ‘One thrives in concerns and calamity whereas perishes in ease and pleasure,’” Xi told M SAR representatives. “Macau is now in a very good situation. In some aspects it’s even unmatched. But we need a sense of crisis to solve some deep-seated issues.”
The new policy is “not going to change anytime,” Tim Seymour, CIO at Triogem Asset Management, told CNBC News in late December, “so the best of days may be over. I think the crackdown is going to continue. Money laundering issues or just control of the purse strings and payment systems is what this is about.”
According to a report by Global Financial Integrity, China lost US$1.25 trillion between 2003 and 2012 due to “illegal outflows.” With the slowdown in the economy, the government is intent on curbing the losses.
“Both the internal and external conditions for the development of Macau have undergone profound changes,” the president said during his visit. “We still need to further consider how to run Macau’s economy well.”
In the past 10 years, Macau has grown into the gaming capital of the world. In 2007, gaming revenues in the region eclipsed that of Las Vegas; by 2013, it had reached $45 billion, seven times Sin City’s take.
In a note from Goldman Sachs last month, the investment firm expressed “concern that China’s anti-grafting drive may not ease anytime soon.” Even so, Goldman sounded a note of optimism. “Our base case still assumes a backend-loaded 20 percent year-on-year GGR recovery in the second half of 2015 post the two new casino openings,” the note said.
Deutsche Bank also was upbeat, writing, “Longer-term policies/investments in infrastructure are evidence that the Chinese government continues to support the growth in Macau’s mass business.”
But Seymour said the future could prove “very challenging” for Macau’s gaming companies. “I think that the growth multiples that we’ve seen in Macau over the last decade are impossible to maintain, even though I believe in the consumption trends and I believe in the wealth-generation trends that are going on in China, Macau and the region.”
And the Straits Times reported that Macau’s gaming industry “is likely to see its worst-performing year in a decade since the industry was liberalized.” Revenues for the fourth quarter of 2014 were expected to drop 20 percent year over year, with estimates that the entire 2014 will see a fall or at most minimal growth from last year’s $45 billion. Bloomberg Intelligence analyst Tim Craighead called 2014 a year of “death by a thousand cuts” for Macau, the only place in China where gambling is legal.
The VIP segment has taken the biggest hit, declining by 19.6 percent in the third quarter, he said; high rollers who once flocked to Macau (dubbed “the Peoples Republic of Casinos by the Times) are visiting less and betting less.
Steve Vickers, chief executive of risk consultancy SVA, summed it up, telling the Asia News Network that Macau’s gaming sector “has entered a potentially turbulent and uncertain phase.”
Many casino operators are responding to the crisis by shifting some of their VIP business to the mass market. SJM Holdings, which owns the most casinos in Macau, has said it is moving 20 tables from the VIP category in order to serve “premium mass-market” gamblers. Others, such as Sands, are focusing on the lower-end mass market.
Meanwhile, Macau’s Gaming Inspection and Coordination Bureau (DICJ) recently sent a letter to junket operators “reminding” them to provide proof that their agents have no criminal record, Bloomberg reported. And the city’s new Secretary for Economy and Finance Lionel Leong Vai Tac said it will be harder starting in January for operators to set up VIP room accounts for gaming promoters.
“We’ll seek to regulate the development pace [of casinos] so that they grow at a reasonable scale,” Leong told reporters last month. “We’ll also monitor the industry, including the in and outflow of the capital involved, and see to their human resource allocation?with all of these I believe that can assist us in monitoring the industry better, and making sure that the sector is healthy.”
With casino jobs no longer bulletproof, some properties have encouraged croupiers to take unpaid leave, according to the Macau Business Daily. An official of one union, Forefront of Macau Gaming, said the operators are promoting unpaid leave among its members working in the City of Dreams and MGM Macau casino-resorts.
Macau Chief Executive Fernando Chui Sai On, who was sworn in for a second five-year term last month, agreed that economic diversification would be a priority of his administration.
All this news has caused Macau casino stocks to fall in Hong Kong trading, reported Bloomberg.
“The glory days of rampant VIP and premium mass gaming are over,” said Aaron Fischer, a Hong Kong-based analyst at CLSA Ltd. “Clearly the government wants to ‘cool down’ the gaming industry and encourage broader based tourism. We believe Macau can evolve as a broader tourist destination.”
The crackdown has had a ripple effect on other big gaming markets as some who once operated in Macau take their business to Las Vegas, reports the Wall Street Journal. Last July, the U.S. Federal Bureau of Investigation raided villas at Caesars Palace where junket operators allegedly set up an illegal betting headquarters to follow World Cup soccer. Caesars employees reported that the group asked for eight computers, more than 20 monitors, three television sets, DSL lines and wireless internet in one of the villas.
On July 29, a federal grand jury in Las Vegas indicted eight people from Asia, including Macau junket kingpin Paul Phua, on charges of running an illegal sports-betting operation.
