On November 26, the Macau government announced that its Big 6 gaming concessionaires will receive new 10-year gaming licenses, with terms expected to begin in January.
The current and future operators are Galaxy Entertainment Group Ltd., MGM China Holdings Ltd., Sands China Ltd., Wynn Macau Ltd., Melco Resorts & Entertainment Ltd. and SJM Holdings Ltd.
GMM Ltd., which made a surprise play for a license on September 14, was considered a potential spoiler due to its track record of success with non-gaming attractions—a big plus for Macau lawmakers. Ultimately, that wasn’t enough to unseat one of the incumbents, and the unit of Malaysian casino giant Genting was shut out.
But what have the winners really won? Macau’s gaming market, once six times richer than that of Las Vegas, has been decimated by Beijing’s zero-Covid policy. With periodic shutdowns and ongoing border restrictions, operators are awash in red ink and burning cash to pay the bills. Recently, Chinese protestors took to the streets across the country, frustrated by the draconian limits and their effects on the economy.
The new Macau is likely to look much different, with mass gaming mostly displacing VIP, a greater emphasis on non-gaming attractions, and a mandate to bring in more international tourism.
Sands China and Galaxy reportedly will spend $2.4 billion each to upgrade their properties. Wynn, MGM, SJM and Melco are expected to invest about $1.9 billion each. Analysts at JP Morgan recently called the commitments “very reasonable,” accounting for just a third of the $35 billion the operators have invested over the past 10 years.
Michael Zhu (l.), Asia Pacific gaming analyst for The Innovation Group, agrees that the potential is still there, if and when Covid is a non-issue. For example, the Sands’ Parisian Macau “generated $544 million in EBITDA in 2019, versus a development cost of $2.5 billion,” suggesting that “a 20 percent to 25 percent return on invested capital is possible” in a recovered market, he said.
More non-gaming attractions are likely to stoke international tourism, “a longstanding goal of the concessionaires and the government alike,” said Zhu. They will “increase Macau’s attractiveness as a tourism destination,” and increase exposure of the city’s unique east-meets-west heritage, a blend of Chinese and Portuguese cultures.
“But there are considerable short-term hurdles,” Zhu added. “The language barrier and the lack of flights between Macau and cities outside of Mainland China make it incredibly difficult for foreigners to visit—not to mention the quarantine requirement and other pandemic restrictions still in place, with no end in sight.” A phased expansion of the city’s airport will help; when complete, it will increase the airport’s capacity by 15 million passengers per year.
The operators are expected to make substantial investments in non-gaming, but do they have the time to also see and gauge the result, given that the license terms were halved, from 20 to just 10 years? “The good thing is they have a very solid foundation to start with,” unlike GMM, said Zhu. “If Genting had won the concession, it would have had to start from scratch, which could easily eat up years of the 10-year term.”
The incumbents, by contrast, “have great world-class facilities and the solid database from 20 previous years of operations.” Now it’s a matter of leveraging those assets and adding to them to fit the new model, which also will rely far less on junkets and VIP gaming.
“VIP was such a big focus, for years it outweighed other segments—that’s not going to be the case for the next concession period,” Zhu said. “VIP is going to have a smaller weight in terms of total GGR and in non-gaming operations as well, and the mass volume is a critical component for what Macau can expect in the following months and years.”
When it comes to meetings and conventions, the SAR has room to grow—but also a lot of regional competition. “Pre-pandemic, MICE business accounted for a single-digit percentage of Macau IRs’ total revenue,” Zhu noted. “Even before that, it was not easy for Macau to compete for major MICE events due to the intense competitive landscape in the region: Hong Kong, Shanghai, Tokyo, Bangkok and Singapore, just to name a few.”
He believes there’s “MICE upside” in Macau, but a number of factors—limited room inventory, a lack of major events, relatively expensive rates, and aging transportation infrastructure will make it “a significant challenge to attain.”
Assuming China manages to put Covid concerns to rest, Fitch Ratings has estimated that Macau gaming revenues could rebound in about two years. But again, it all depends on the management of Covid-19 and Beijing’s approach to containment.
Asked when operators will start making money again, Zhu said, “That’s a tough one. It really depends on many factors; the biggest one is how Beijing and the Mainland Chinese government controls the pandemic cross-border controls; eVisas and individual visa schemes really have a lot to do with the overall volume. It depends on how soon or when China is going to loosen the policy and allow people to travel freely within the country.
“Right now, nobody knows for sure how soon these protective measures can end—in a few months? Longer? Meanwhile, the cash burn continues. The Big 6 concessionaires have been under pressure for quite some time. Everybody wants to see the end of these lockdowns and restricted policies as soon as possible.”
While celebrating their new concessions, operators may also want to fasten their seatbelts. It still could be a bumpy ride.
