Government crackdown continues
As Macau works to diversify away from a one-business economy based on casino revenues, one of its biggest assets could now be perceived as a fundamental weakness.
According to a new report from Fitch Ratings, “the biggest impediment to diversification for Macau may be what casino operators and investors consider its main strength—its proximity to China.”
Why? The report states that the passion for high-stakes gambling among high rollers from Mainland China and Hong Kong enabled Macau to prosper without developing other tourism attractions—or even its mid-market gaming base. With VIP gaming on the slide due to greater scrutiny by the government, the whole city is at risk.
“Even amid the current slowdown, each table game generates more than $12,000 per day, more than double the most productive Las Vegas Strip casinos,” the report stated. “This strong gambling demand tends to shrink the nongaming aspects as percentage of the whole pie and price out more casual gamblers and non-gamblers.
“When setting benchmarks and goals,” the report continued, officials in the territory “need to be cognizant of Macau’s supersized gaming revenues, in part inflated by the VIP commissions, and the high 39 percent gaming tax rate that will make catching up to the Las Vegas Strip’s nongaming mix difficult if not impossible.”
Since last June, Macau has been on order from Chinese President Xi Jinping to offer more than casinos as a way to lure tourists. The city is looking at the Las Vegas model, where countless nongaming attractions have supplemented and in some cases replaced gaming dollars.
Fitch Ratings Director Alex Bumazhny notes that in 2014, 63 percent of Sin City revenues came from nongaming activities, while Macau’s nongaming sector contributes less than 10 percent of the resort’s gross revenues.
However, some analysts as well as operators say if Macau delivers on its pledge to mix up its tourism offerings, it could come out on top—eventually. But it won’t happen overnight, or anytime soon. Among the many complicating factors are the weaker Chinese economy, a devalued currency, and Xi’s strict crackdown on graft, money laundering and corruption. According to GGRAsia, the economic indicators and “signs of capital outflows” are canceling out government attempts to shore up mainland China’s stock market.
U.S.-based analyst Cameron McKnight wrote, “We remain neutral on Macau gaming as the market adjusts to a ‘new normal’ of: (1) tighter government oversight, (2) tangible signs of a weak Chinese economy, and (3) a Macau recovery that is likely to be flatter than prior upturns.
“We continue to believe Macau revenues will be pressured this year with stabilization at some point. When that occurs and growth resumes, we firmly believe we will not see another V-shaped recovery.”
Analysts generally think that August will record a 36 percent to 38 percent year-on-year decline. The lottery too, which unlike casino gaming is legal on the mainland, is also experiencing a downturn. Sales for July slumped 27.3 percent year-on-year to approximately RMB27.1 billion (US$4.2 billion), according to country’s Ministry of Finance.
The most significant event, of course, has been China’s seesawing stock market. Last week’s rout sent ripples of alarm worldwide, causing upheaval on Wall Street and in other markets. The crash was described as “carnage” by Forbes magazine, which added that China faces “chilling new realities” as its moneymaking machine—gaming—stalls.
The devalued yuan or renminbi will make it harder for travelers to visit Macau, and more expensive when they get there. Though other markets in the region have banked on China’s growth, “none of them are as dependent on China as Macau,” according to the Forbes piece. “Betting on China is still likely to pay off in the long run. But recent weeks make that long run appear substantially longer.”
Meanwhile, the crackdown is unrelenting. On August 24, Macau police arrested 17 people at five Macau pawn shops for allegedly using China UnionPay Ltd. point-of-sale terminals to funnel cash out of the mainland. Deutsche Bank analyst Karen Tang wrote the campaign could increase as China tries to “control capital outflows, especially after the recent renminbi depreciation.” And China’s Minister of Public Security Meng Qingfeng has said illegal financing and money laundering are the targets of an operation that will last until late November.
“Some ‘gray funds’ have been transferred through underground money shops across the border, which not only poses a serious risk to our foreign exchange management but also disturbs the order of financial and capital markets and threatens our financial safety,” Meng said on the ministry website.
And as Tang wrote, since April, “66 illegal financial institutions [including offshore companies and underground banks] have been busted, and over 160 suspects have been arrested, involving up to RMB430 billion [US$53 billion].” Analysts at Daiwa Securities Group Inc. said the crackdown is “another incremental negative on Macau’s liquidity environment.”
“While the exact extent of these crackdowns is difficult to quantify, our ground checks point to a direct impact on customer sentiment and business volumes,” analysts Jamie Soo, Adrian Chan and Jennifer Wu said in a note last week.
If Macau were graded on its efforts to diversify, it would get a “D,” according to CNBC News.“The biggest challenge for Macau casinos is to try and figure out what non-gaming amenities to develop,” Grant Govertson, principal analyst at Union Gaming, told the network.
In an interview with the Macau Daily Times earlier this month, no less a Macau booster than Melco Crown’s Lawrence Ho said he is skeptical about the government’s plan. “Nongaming doesn’t make any money and it will never make any money,” he said. For all the foolish people out there that think non-gaming is going to save the day, it’s not.”
But Govertsen remains cautiously optimistic. “Between the wealth generation in China, the infrastructure being developed to move people around, and the resort supply being built in Macau and neighboring Hengqin Island, all the pieces are being put in place for Macau to eventually take the entertainment crown away from Las Vegas over a very long period of time.”
The city will have to solve some of the problems generated by tourism. A new study from Glenn McCartney and Winnie Lei Weng In from the University of Macau indicates that the people who call Macau home are weary of overcrowding, traffic congestion, and a subpar public transportation system. In total area, Macau is less than 12 square miles, yet accommodated some 31.5 million visitors in 2014. The study, published in the journal Tourism and Hospitality Research, said locals look forward to a new light rail system, expected to be complete by 2018, and other improvements that will add to the quality of life.
