Six in the City
While the Macau government has attempted to apply the brakes to the region’s gaming industry, it seems the race between the existing six contenders has only just begun.
There was no hard sell necessary; just contented smiles all round. Quickly following Macau Chief Executive Edmund Ho Hauwah’s announcement in April of a host of measures aimed to cool the region’s gaming boom, it seemed clear that the six existing operators had just been handed a cash cow. Exclusive rights to the world’s most lucrative gaming market, shutting out any immediate threat of further competition, including from the world’s largest gaming company by revenue, Harrah’s Entertainment.
So what exactly does the announcement mean for Macau’s six gaming operators and their future plans for the city? Director of Macao Polytechnic Institute’s Social, Economic and Public Research Centre, Professor Zhonglu Zeng, said it meant “very little” in the short term. Professor Zeng said there was no doubt the announcement indicated the government thought the industry was “big enough at the moment”, but he said it was more of “a gesture” than action. He said this was clear from Mr Ho’s announcement that gaming projects under construction, approved or under discussion would not be affected. These projects represent around US $20 billion, will add more than 20,000 hotel rooms and more than double the number of casino tables and slot machines in Macau. According to Macau’s Gaming Inspection and Coordination Bureau in the first quarter of this year there were 4311 gaming tables and 13,552 slot machines in the city. In 2002 there were 339 gaming tables and 808 slot machines.
“I don’t think for many years to come this announcement will have any actual effect on the industry because there are so many big casinos under construction or in the planning stages,” Professor Zeng said. “The government announcement really is just a gesture at this stage.”
According to Professor Zeng when looking at the future of the region’s gaming industry, it is far more important to look at demand rather than supply. “If the demand is very high the industry will find ways to get around the decision very easily,” he said. “Capacity is not fully used at present, the main factor to look at and the thing that will have the final say is market demand, it is far more important than supply.”
The exact reason behind the government’s move to freeze gaming licences, not allow any more land for casinos, cap the number of gaming tables and reign in the region’s junket operators are uncertain. Many have speculated Beijing forced its hand due to concerns about the negative social impacts of gambling. Macau gaming lawyer Antonio Ramirez and Macau University law lecturer Luis Pessanha prepared a report looking at the government’s announcement that will be published on the gaming think tank website urbino.net this month. Macau Gaming Policy Update stated that it appears the government was “finally pushing forward the next big wave of gaming legislation” which had been in the pipeline for the past five years.
The report said while it was too early to fully understand the legislative reform, the government was expected to determine gaming free areas in Macau around hospitals, schools, temples and churches. The report also identified a series of gaming industry problems in need of urgent regulation. These included the fact that there are no legal requirements imposed on the management of gaming operators, slot machines are unregulated and have no set minimum percentage of return, there is no licensing system for gaming vendors, no fines for breaching gaming laws and no legal framework to address problem gambling. It said the last major legal intervention relating to Macau’s gaming law was done in 2004 when credit for gaming was regulated.
The report described the government’s announcement as good news for the gaming industry, as an “obvious lack of key regulations had been highlighted in the recent past and clear rules are essential to ensure fair competition and the healthy future development of the Macau gaming market”. Australian-based gaming researcher Dr Desmond Lam says the announcement sends a clear message that the government is aware of rising community concerns about gaming. Dr Lam, who previously worked at Macau University, said the move was expected and was for the “good and sustainable development of Macau”. “Some may argue that the market will now turn inwards and competition will intensify among incumbents,” Dr Lam says. “It is possible, but I think competition is likely to intensify with or without such an event as the market matures.”
Regardless of its motives, it appears the government has kept its side of the bargain, with the existing operators confident the announcement will be good for business. All of the operators contacted by Closer indicated that planned or future developments would continue.
Las Vegas Sands Corp (LVS) president Bill
Weidner welcomed the gaming freeze at the company’s first quarter earnings call last month. Despite admitting that there was still a lot LVS did not know about how the rules would be administered, Mr Weidner said the company was “still very bullish about the long-term direction for Macau”.
“Looking at the big picture, we do believe there are some likely outcomes that will positively impact Macau’s future, as a destination, and more importantly our position,” Mr Weidner said. “Growing demand coupled with a supply limitation backstop, that is the stated objective of the Macau authorities, bodes well for the long-term prospects of our strategy. With a critical mass of superior complete destination supply on Cotai, that will drive that growing demand and allow us to provide superior returns on the dollars we put to work in Macau.”
Mr Weidner was joined by the company’s chairman Sheldon Adelson in giving his take on the new restrictions. Mr Adelson called it a “very good first step” and said it appeared the company was “speaking to welcome ears”. Rather than any fears of curtailing business, one of the biggest concerns outlined at the meeting was the slowdown in construction on the Cotai Strip due to delays in the government approval processes following the high-profile Ao Man Long corruption case.
A confident Mr Weidner told the meeting, no-one is going to spend billions without having additional capacity. “I think if you read between the lines what you see is… they don’t necessarily like the old Macau style proliferation of the casinos that don’t drive visitation from further away,” Mr Weidner said. “Those that are what you would call cannibalistic or call it leeches from those casinos that drive first class visitation from around the region, I believe, are going to be controlled and frowned upon.”
Likewise MGM Mirage chairman Terry Lanni was equally as pleased with the news. “We frankly see this as a positive development,” Mr Lanni said. “We do not believe that it will have an impact on our expansion of MGM Grand Macao, which is underway, or on our plans for a resort on Cotai where we have submitted a development plan for that site.”
Mr Lanni said he believed each of the company’s expansions “seem to fall within the statements” made by Mr Ho. He said he would be seeking clarification in meetings with the Chief Executive this month. “But we feel pretty comfortable,” he added. Mr Lanni said he did not see the announcement as new laws, but rather “a change in the interpretation of what could be done”. “I think it is positive. I think the other concessionaires and sub-concessionaires have made similar statements,” he said. “We believe we have each of our items sufficiently in the pipeline the way we understand it. But on balance I think those of us with concessions and sub-concessions are quite pleased.”
Pleased is an understatement when you look at the response from Melco PBL Entertainment. The company’s chief executive officer Lawrence Ho was quick to publicly announce that he fully supported and endorsed the government’s position. “The new regulatory structure will strengthen the market and is expected to be beneficial to the industry as a whole,” Mr Ho said. “We look forward to supporting the Macau authorities as they formulate and implement these policies in the coming months.”
Wynn Resorts chairman Steve Wynn was adamant his company’s planned project on the Cotai Strip would go ahead. “Cotai is proceeding… we’re in design development very intensely now, on Cotai,” Mr Wynn said. “We made up our mind what we’re going to build there. I’ve said it publicly and nothing’s changed.”
In an interview with the Macau Daily Times last month, the director of Sociedade de Jogos de Macau (SJM) Stanley Ho Hungsun, described the government measures as necessary to stop the “cut throat” competition between operators. “We must all agree that in Macau now we have far too many casinos and there is no point of opening up more casinos, more than enough, more than rice shops, so it is something we don’t want to encourage,” Mr Ho said.
Mr Ho made it clear SJM would push ahead with plans to revamp the Jai Alai casino, in Macau. An application to redevelop the casino and adjoining New Yaohan department store site have been submitted to the government and construction is expected to begin in June. The report said the company was seeking clarification on what it could
build on its two small plots of land on Cotai, located in front of the exhibition hall of Venetian Macao and close to Macau Dome. SJM director Ambrose So said “we have submitted our application”.
Galaxy Entertainment Group did not respond to Closer’s requests for an interview. Professor Zeng said it was clear from the “stalling” on the Galaxy Mega Resort, on Cotai, that things were uncertain. “Why are they not building very fast, because time is money,” Professor Zeng said. “Because they are not sure they can compete against the likes of The Venetian, they are not sure if their model will be successful. They are thinking.”
New York-based Jeffries & Co analyst Lawrence Klatzkin warned that the government’s statements were “broad and needed to be fleshed out”. Mr Klatzkin said in a year when Macau’s gaming revenue surged 62 per cent in the first quarter, the freeze appeared to keep Harrah’s Entertainment, the world’s largest casino company by revenue, from entering the market. “It may stall Harrah’s hopes to rezone the golf course purchased by a subsidiary in September,” Mr Klatzkin said. Harrah’s paid US $577.7 million or MOP 4.6 billion for Macau’s Orient Golf Course on the Cotai Strip last year. The 175-acre site was Harrah’s first move into Asia following failed bids for gaming licences in Macau in 2002 and Singapore last year. Harrah’s spokeswoman Jacqueline Peterson said the company’s plans “to run a world-class golf course in Macau have not changed”.
Professor Zeng said there was the possibility that Harrah’s could try to secure a licence through acquisition. “There is nothing to say that they won’t try and buy one of the smaller operators,” he said. “But for the time being they cannot build a new casino, even if they get a licence.”
One possible target could be Galaxy Entertainment, which is listed on the Hong Kong exchange and operates five casinos in Macau. However, a standstill agreement between Galaxy and LVS prevents Galaxy from doing a deal with any US operator. This agreement was struck as part of LVS’s casino sub-concession deal with Galaxy. Hong Kong-based analysts have speculated that if Harrah’s wants to buy its way into Macau, Melco PBL remains the likely target.
It could have some competition though, with Malaysian casino giant Genting Group refusing to rule out entering the Macau market. Genting’s head of strategic investments and corporate affairs Justin Leong told Forbes Asia last month that despite the government’s licence freeze he had not given up on setting up in Macau. “[Macau] is another possible opportunity,” he told Forbes, adding that Genting could team up with another licence holder or buy “into a licence holder”.
Macau-based managing director of gaming industry consultancy firm Spectrum OSO Asia, Norman MacKillop, said there were still opportunities for other operators. Mr MacKillop said the three sub-concessions were created through a “loophole” and casino management agreements had allowed non-licensed operators to enter the market. “It seems our current regulations are riddled with loopholes,” Mr MacKillop said. “With a bit of creative legal interpretation, new ones shouldn’t be too difficult to find.” Despite the fact that Macau will have a new Chief Executive next year, Professor Zeng said he did not see this an opportunity to pave the way for new operators. He said it was clear Macau needed to focus on setting up its infrastructure and service culture to a world-class standard. Immigration, taxi and hotel check-in queues have swelled to previously unheard-of lengths. Regular Macau visitor Jonathan Chow, a Hong Kong businessman who recently visited for a weekend, described the immigration queue as “disgusting”. Mr Chow waited more than 90 minutes at the ferry terminal to make his way through the check point. “This is the type of thing that will turn people away, so it is about time the government started doing something about it,” Mr Chow said. “You can never get a taxi and the queue for just about everything in Macau is really off-putting.”
According to Professor Zeng the biggest threats to Macau’s long term success are international gaming competition and infrastructure and service concerns. “The infrastructure cannot cope already, this is a small city with increasing density of population, if the gaming industry was allowed to continue to expand things could get a lot worse,” he said. “Life quality is decreasing, while inflation is increasing and many people are unhappy. The government needs to focus on getting the infrastructure in place to make sure the whole city can work.”
Despite record revenue and visitor numbers, Professor Zeng said it was important to realise that Macau was not “risk free”. He said gaming competition from Singapore, Taiwan and the Philippines was a major concern. “If there are too many casinos surrounding Macau, then we will be affected,” he said. “There are two very important factors here, and that is critical mass and location. We will have the critical mass and so far our location is the best, but if Taiwan builds a gaming industry competitive to Macau’s the city could be in some real trouble.”