Macau: Has China’s Jewel in the Gown Faded?

Las Vegas Sands, the first western casino to open in Macau after deregulation, has posted a decline of 17% or $1.44 billion in revenues from operations in Macau in the second quarter. The operating income has also shrunk by 18% year-on-year. The cumulative effect of these two downslides is that the casino operator is currently facing 32% lower net profits.

The decline in the Macau figures reported by Las Vegas Sands is indicative of the greater trend that has hit casinos in the region. The first signs of a slowdown were met with hopes that the market would soon hit bottom and start to return to its former altitude by the end of 2016.

Regional Slowdown Causes Speculation

Macau, on the whole, has shown a 16.3% decrease in gaming revenues compared to last year, drawing just $2.25 billion. With over 35 casino operators, Macau has been hit by an increase in regulations and a slowdown in the Chinese economy.

Macau has imposed a limit on the number of new tables that can be added to 3%. The real worry is the end of the line for the current crop of gambling licenses that have been issued. All casino operators will have to renew their concessions and sub-concessions at the end of the 20-year period. In 2020, MGM and SJM will be up for renewal and Galaxy, Sands, Melco and Wynn licenses will expire by 2022. Speculation on the duration of the new licenses includes shorter holding periods than 20 years. As of now, the casino business in the region is dependent on the wealth of visitors to the strip and 70% of Macau’s income comes from casino taxes. Gambling tax has been raised to 40%, besides fixed premiums and taxes on gaming promoters.

Additionally, there are fears of China’s central bank lowering the yuan to as low as 6.8 yuan per dollar. This adversely impacts Macau, since its currency (patacas or MOP) is pegged to the US dollar.

Regional Competition Adds Fears

The nearby island of Saipan has benefited from the Chinese crackdown on casinos. Saipan is the largest island in the US Commonwealth of the Northern Mariana Islands, which makes them fall under US law. Till recently, Best Sunshine International was the only casino, yet the region records $62 million in revenue every month. The first quarter of 2017 will see the Best Sunshine open a hotel here.

Another advantage that Saipan has over Macau is that proxy betting is not banned here and junket operators (middlemen who travel and play for other high-net players) have noticed the potential of Saipan. One such system is the rolling chip program. A player buys non-negotiable chips that cannot be converted into cash but offer a 1.3% rebate on use. This motivates players because they earn from playing more. Credit is therefore offered by the casino and not the junket operator. Casinos offering credit is yet another tricky issue as Hong Kong Entertainment ran afoul of rules on the neighboring island of Tinian. They lost their license and had to subsequently declare bankruptcy.

The fortunes of Macau are entwined with the region’s casinos. The casino industry contributes more than 50% of the region’s GDP. With this critical industry being impacted by regulations, the region’s property market has shrunk by more than 60% since 2014 and significantly reduced employment not only in Macau, but in neighboring regions.