Some Details Still Missing in Macau Tender Process

Publicly at least, there were sighs of relief in Macau January 14, when details of the city’s concession retender and proposed gaming amendments were released. News that the city will retain up to six concessions was hailed by current operators, but there’s no guarantee all the incumbents will be chosen. And one consultant warns it’s too early to celebrate.

Some Details Still Missing in Macau Tender Process

On January 14, the Macau government released details of planned amendments to the SAR’s gaming law and the retender process for gaming concessions this summer.

Though the plan is still subject to change, the details as proposed have been viewed as “net positives” for casino operators—particularly the plan to retain up to six concessionaires, the same number in operation today. That has eased speculation that U.S.-based operators might get the boot, the number of concessions would be forcibly reduced or the Chinese government would assume control of operations. Even a plan to inject government delegates into casino operations has seemingly been abandoned.

Barron’s called the proposal “less onerous than feared by many investors,” and said Wynn Macau and Sands China “will thrive” in the new Macau. A Nasdaq report said the announcement “is likely to act as a catalyst in boosting the gaming industry’s prospects, which were earlier hampered by coronavirus-related woes.”

Will Big 6 Survive?

Newcomers are expected to join the bidding, but it’s likely the standing Big 6 will stick around for another concession term—though the term itself has been halved, from 20 years to 10, with an optional three-year extension. For one thing, the current operators are known quantities, having dominated Macau’s gaming industry since 2002. For another, they have experience in the world’s most profitable gaming hub, which in some cases predated their tenure in Macau.

However, shorter concession terms could discourage big investment by the operators.

As previously reported, the Macau government will dispense with sub-concessions, but it’s given the existing satellite casinos—most of which operate under SJM—three years to fold their tents and depart.

The tax rate remains unchanged at 35 percent.

All six operators expressed appreciation to the government for providing clarity on the matter. Galaxy Entertainment Group (GEG) released a statement saying it will “proactively support the related work of the Macau SAR government as well as the gaming industry’s sustainable and healthy development, in order to contribute to Macau’s long-term prosperity.”

GEG Chairman Lui Che Woo was quoted as saying, “We believe that having optimized laws and regulations in place will lay a solid foundation for the city’s steady development and propel the synergetic development of the gaming industry, leading to Macau’s overall economic resilience and diversity.”

Melco Resorts & Entertainment likewise pledged fealty to the long-range plan, which includes the development of more diversified, less gaming-centric industries in Macau and on the neighboring island of Hengqin.

MGM China said the tenets of the bill are the foundation of a healthy and sustainable gaming industry. Ditto from Sands China and SJM Resorts, which said they are optimistic about the future of Macao’s integrated resort industry and hope to continue to play a part in its success.

Wynn Macau Vice Chairwoman, COO and Executive Director Linda Chen said the U.S.-based company will completely follow the guidelines and arrangements from the government as well as abide by all tourism policies. Wynn, too, said it believes the revised regulations will strengthen the sustainable development of Macau over the long term, and it is looking forward participating in the tender process.

The Fine Print

According to Macao News, concessionaires will be re-assessed by the Gaming Inspection and Coordination Bureau (DICJ) every three years. A draft amendment to the law warns that any threats to national and local security are grounds for license revocation. Moreover, concessionaires must ask permission from the SAR chief executive to initiate, terminate or carry out activities in other jurisdictions. In such cases, they must alert the DICJ “as quick as possible” if these activities involve shareholders holding a registered capital stake equal to or higher than 5 percent.

Junket promoters have not been banished, but will only be allowed to provide services to one gaming concessionaire, according to the gaming law amendment bill.

According to GGRAsia, several brokerages say the bill is good news for the industry.

“The proposed changes should give investors some relief from the uncertainty around Macau’s future,” said Sanford C. Bernstein in Hong Kong. “We do not see anything overly negative stemming from the proposed law changes,” analyst Vitaly Umansky wrote in a report.

JP Morgan Securities (Asia Pacific) Ltd. said that while “we can’t say all the license risks are gone… most of the key concerns—gaming tax, dividend and government delegate among others—should be greatly alleviated if not removed with this conference.”

“We were surprised the government’s stance on some contentious topics has become far less onerous, if not surprisingly accommodative in this draft gaming law, versus initial plans,” wrote analysts DS Kim, Amanda Cheng and Livy Lyu.

Daiwa Capital Markets Hong Kong Ltd. stated that “details of the new gaming law discussed by the Macau government suggest that they have followed through on most of the original proposed amendments from the public consultation,” a 45-day hearing process that ended on October 29.

“Overall, we view the press conference was positive on the whole,” said Daiwa analysts Andrew Chung and Terry Ng.

Brokerage B. Riley Securities Inc. observed that, “while the weak operating environment of Macau should persist due to start-and-stop Covid-19 restrictions and a somewhat disorderly unwinding of the VIP market, for those more interested in the long-term mass gaming and overall ‘Macau story,’ the announcement should be taken as welcome news.”

Jefferies Global Gaming added, “We maintain our view that government policies on post-Covid market access will drive GGR recovery, with (Chinese New Year) a likely near-term disappointment. Given limited earnings visibility, we prefer U.S. names.”

Question Marks Remain

Some points are still unclear, wrote Ben Blaschke of Inside Asian Gaming—principally information on the cap on gaming tables and slots for each concessionaire. He called it “an unexpected feature of the draft bill, with the cap to be policed by way of a minimum annual gross income limit, and therefore minimum tax limit, that each table or machine will be required to generate.

If the minimum taxation amount isn’t reached, the concessionaire must make up the difference. If it’s not reached for two years running, the chief executive may reduce the number of tables or machines authorized for use. There is no specific detail on how the government will determine such limits, Blaschke wrote.

And according to David Green, an advisor to the Macau government during the drafting of the original Gaming Law 16/2001, “Any uncertainty around the price of admission is potentially a serious issue.”

While it may be that concessionaires propose their own minimum GGR-per-unit, “The risk to the government in setting that number itself is that it might be wildly off the mark, and they find either that no one but the incumbents are interested or that it is overwhelmed by respondents.”

Green also has said the shorter 10-year license terms mean Macau is not the prize it used to be, exacerbated by the provision that gaming tables or slot machines could be reduced if minimum GGR numbers aren’t met.

“This will be a real potential deal breaker for concessionaires, depending upon what that mandated minimum GGR number is,” he said.

Consultancy Steve Vickers Associates Ltd. (SVA) suggests there is still a chance the retendering process may be pushed back a few years, beyond the June 26 deadline, and also warned investors to wait before they celebrate.

“The primary factor which the Chinese and Macau authorities consider when evaluating concession renewals and new regulations is clearly the national security criteria and whether, for example, capital flight can be contained, especially when linked to US operators seeking to repatriate dividends,” Vickers stated.

The firm said the emphasis on national security indicates a heightened political risk to foreign investors, and warned them to avoid “being swept up too far in the current market euphoria.”

“Understanding and being able to gauge political risk has never been more important in this respect,” Vickers added. “Macau’s government may favor domestic champions, or at least demand changes in ownership structure to foreign-controlled entities, which may be problematic.

“Therefore, not all current concessions may survive the process.”