Investors in Macau gaming stocks got a surprise rollercoaster ride last week, as the threat of a government crackdown on the industry sent stock values plummeting.
On September 15, stocks lost a record $18.4 billion in combined market value following the announcement that officials would amend casino regulations, tighten restrictions on operators, appoint government representatives to “supervise” concessionaires and also rule out subconcessions.
The Bloomberg Intelligence index of the Big 6 operators—Galaxy, SJM, Wynn, Sands, MGM and Melco—fell by a record-breaking 23 percent. It was a fire sale especially for U.S.-based operators, according to Forbes, with Sands China Ltd. sinking by 33 percent and Wynn Macau Ltd. 34 percent, the sharpest declines ever for both. Galaxy Entertainment Group saw a 20 percent drop, the steepest in a decade.
Sands China, MGM China and Melco Resorts all are subconcessionaires that exist under the full concessions of Galaxy Entertainment Group, SJM Holdings and Wynn Macau. The proposed overhaul does not mean their existence is threatened, according to Bernstein analyst Vitaly Umansky. He wrote last week that “the six operators here today will be here tomorrow.” The current 20-year concessions expire next June, but the law allows extensions of up to five years under special circumstances.
It’s unclear how this discussion applies to third-party casinos, known as satellite, which operate under a separate agreement with gaming concessions and most of which operate under SJM’s gaming license, reported Macau Business.
Officials in the territory, the only place in China where gambling is legal, have invited the public to weigh in on the proposed changes during a 45-day consultation period, which will end October 29. Secretary for Economy and Finance Lei Wai Nong said the inquiry covers nine major topics:
- The number of gaming concessions to be granted
- The term of those concessions
- Stricter official requirements for concessionaires
- Employee protection measures
- Strengthened verification mechanisms for concessionaires and junket operators
- The deployment of government representatives as part of gaming operators’ management teams
- Non-gaming elements
- Social responsibility mandates
- New definitions of criminal offenses
“The government aims for the amendments to promote the continuously healthy development of Macau’s gaming industry and increase the sector’s competitiveness,” said Lei. “We expect the new development phase of Macau’s gaming industry to contribute more to the city’s sustainable socioeconomic development.”
The government didn’t specify the number or duration of gaming concessions, but said “too many concessionaires would possibly cause vicious competition, even resulting in more irregularities in the sector. This would make it more difficult for the government to supervise the sector, adversely affecting Macau’s good name as a world tourism and leisure center.”
The term of the new concessions also wasn’t made clear, but the Macau government seems to have implied that a 20-year term may be too long. Analysts speculate they could be cut in half.
The public consultation document also proposes to add new penalties for operators that accept cash or other deposits illegally; if violations are made by VIP junkets, concessionaires could bear the legal responsibility.
In the operators’ favor is one bald fact: the government needs the gaming sector to maintain a certain size to ensure sufficient taxes. Gaming accounts for some 80 percent of government revenues in Macau and 55.5 percent its GDP. The consultation doesn’t address the issue whether Macau’s current gaming tax rate of 35 percent should be adjusted.
“Gaming tax should be considered very cautiously as it is relates to Macau’s financial income, economic development and social welfare,” Lei said. “The government has no specific prerequisite on the number of gaming licenses although it needs to maintain a certain scale to ensure tax revenue. But it (the number of gaming concessions) should not expand without limitation.”
The Macau Post Daily reported that the move to tighten regulatory controls “took the industry by surprise,” and left many questions unanswered, including a proposed increase in local shareholdings of casino companies, and a plan to install government representatives directly into the gaming concessionaires in a supervisory capacity.
“Dismay rippled through industry players and analysts after the announcement,” the newspaper reported.
“There’s a debate over whether China is even investable right now,” said Jason Ader, CEO of New York-based SpringOwl Asset Management and a former Las Vegas Sands Corp. board member. “You never like to see increased regulation, increased taxes, restrained movement. That all seems to be the status quo.”
He added, “It’s sort of all going in the wrong direction in China. To the extent investors are nervous about China, Macau doesn’t feel like the place it was five years ago for a lot of reasons.”
JPMorgan Chase & Co. analyst DS Kim downgraded the six operators to sell or neutral on the news. “We think this announcement would have already planted a seed of doubt in investors’ minds, which is probably enough to de-rate these names until clarity emerges on key points,” he wrote.
All this is unfolding as the world’s largest and most profitable gaming hub struggles to right its chief industry, which was hard-hit by the Covid-19 pandemic. Travel restrictions kept Chinese high rollers away; gaming revenues for August slumped 82 percent lower than the same period in 2019.
Perhaps this turn of the screw shouldn’t be surprising, as China has been reining in VIP play for several years now due to concerns about money laundering and currency flight. Beijing has also cracked down on junkets and cross-border gambling and made financial transactions more difficult.
Casino operators catering to high rollers may “face greater pressure to hedge their bets, invest more in non-gaming attractions and work harder to woo the premium mass market,” according to Bloomberg Intelligence gaming analysts Angela Hanlee and Kai Lin Choo.
According to Inside Asian Gaming. Lei also rejected the possibility of introducing online gaming in a market where tourism relies so much on the land-based economy.
The government also wants greater contributions from operators in the hiring of local residents, especially those with disabilities, plus charitable, educational, scientific and cultural initiatives. Authorities also say the gaming sector should take a lead role in driving the diversification toward nongaming.
The government also suggests that the minimum share capital requirement for any local concessionaire be upped from the current MOP200 million (US$25 million) threshold, an amount set by the gaming provisions enacted in 2001. Again, the document doesn’t suggest a new figure.
“The existing legal framework has been in force for about 20 years, and during this period, gross gaming revenues grew by 21.5 times by 2019, compared to 2000,” noted the government.
The document also proposes to include in the gaming law penalties against illegal deposit taking from the general public by casino concessionaires, their shareholders or employees, reported GGRAsia. It suggests offenders could face a sentence of up to five years in prison.
“We are open to suggestions,” Lei said. “We are going to listen to what the public has to say. But we will maintain the main principle, which is that the size of [the gaming industry] cannot be significantly reduced so that we can ensure the basic needs for the lives of our residents and the investments that come from the gaming tax collection.”
From now until October 29, the secretariat will host five public hearings; the results of the inquiry is set to be released by May 2022, a month before the current concessions expire.
