Investors in Macau casino stocks have lost billions of dollars and a comparable amount of confidence with the government’s announcement of proposed new rules for casino concession-holders. These rules may prove to be hindrances or draconian.
The actions should not surprise readers in this space. Just two weeks ago, I wrote about the nearly decade-long swoon in those stocks with a warning about the potential for the Chinese government to rein in gambling, which is anathema to the Communist ideology.
In the double-speak of the Chinese Communists, the pressure on casino operators isn’t called pressure. It is couched in otherwise laudable terms of diversifying the Macau economy.
Here are a few of the proposals and our thoughts on them.
- Casinos will be expected to proactively lead the diversification of the economy away from gaming. On the surface, a sound idea. But a cynic might suggest that casino companies spending their money to lessen their importance is reminiscent of Karl Marx saying, “The last capitalist we hang shall be the one who sold us the rope.”
- Commissars in the C-Suite. Government delegates would provide oversight on casino operations. One assumes the ostensible purpose is to assure diversification gets priority and other innocent-sounding requirements are met, like responsible gambling. Again, it’ll sound good, but the truth will be in the execution.
- Dividends of any kind would have to be approved by the government—not based on sound financing, but on meeting the unspecified requirements, no doubt the ones the commissars, er, delegates, are assigned to enforce.
- The 10 percent ownership now required by a Macau resident managing director would be raised, in some as-yet unspecified fashion. The purpose would be for the companies to make Macau their center. Maybe this explains why Las Vegas Sands is abandoning Las Vegas, violating the sound business principle of geographic diversification.
Obviously, there are other important issues to be hashed out, like how many concessions will be allowed and the tax rate, though hints given at a press conference on the topic are that they will remain unchanged. Also important: whether concessions will be negotiated with incumbents or be put to bid.
The Chinese government gave a big hint at its plans a week before the Macau announcement when it revealed a new economic development arrangement combining Macau with Hengqin Island in neighboring Guangdong Province.
On the surface, such a development could benefit casinos, as visitors to Hengqin can hop over to the gaming tables in Macau. But the union immediately reduces the importance of gaming to the combined economy, and gives incentive to the Macau government to benefit through the non-gaming tourism development on Hengqin. And the less important gaming is, the easier it is for the national government to put on the pressure to rein it in. And this, possibly, will be financed by casino companies forced to lead in the diversification.
For those who consider this alarmist thinking, consider the recent Macau election for its 14 legislative members chosen by the public. In what the South China Morning Post reported as an unprecedented action, 21 candidates were disqualified from the ballot, including some current members of the legislature.
The reasons: They hadn’t proved loyal enough to Macau, whatever that means.
The result was the lowest voter turnout in Macau history, and several thousand ballots submitted blank or defaced by written vulgarities.
However, the national government was pleased. Its Hong Kong and Macau Affairs office said the election reflected “patriots administering Macau” democracy.
A spokesman was quoted by the Post saying: “Macau residents have actively participated in the elections in an orderly manner and exercised their right to vote in accordance with the law, which fully demonstrates the successful practice of ‘one country, two systems’ with Macau characteristics.”
That’s the kind of double-speak even George Orwell couldn’t have imagined.
So the sell-off in Macau casino stocks might present a rare buying opportunity. But any investor needs to be eyes wide open about the political risks.
