Macau, China’s casino capital, has enjoyed a decades-long winning streak. It might finally end

The special administrative region is the only jurisdiction under Chinese sovereignty where casinos are allowed to operate, making Macau the go-to destination for the country’s high-rolling millionaires. Tables at Macau’s 41 casinos generated six times the revenue of the 144 casinos in Las Vegas, racking up $36 billion in revenue in 2019. The gaming industry contributed over half of the city’s $54 billion pre-pandemic GDP, provides employment for roughly 17% of Macau’s 600,000 residents, and generates 80% of the local government’s tax revenue.

But Beijing has long warned Macau that the region must diversify its economy away from gambling—a vice the Chinese Communist Party has zero tolerance for within mainland China. This week, after years of inaction, the Macau government began to comply with Beijing’s direction.

On Tuesday, the local gaming regulator proposed a series of new rules for casinos that demand greater government involvement, reduce reliance on gambling, and threaten to revoke current casino licenses. Terrified their good luck in Macau might be at an end, investors stripped a record $18.4 billion from the city’s gaming stocks by Wednesday, with the top six operators losing an average 23% of their value.

The new rules come ahead of a once-in-two-decades license allocation due in June next year, which offers no guarantees the six operators ruling Macau’s gambling market today will be granted permission to remain.

Shuffle

On Tuesday, Macau’s gaming regulator, the Gaming Inspection and Coordination Bureau (DICJ) released a draft of proposals to reform the 2001 law that regulates the local gaming industry. The proposals, which are open for a 45-day public review, advocate for greater government oversight of casino operations as well as limitations on the number of casino operators allowed in the city of Macau.

The regulator’s proposals cover nine “discussion points” across an array of fields, including corporate social responsibility, employee protections, and the “promotion of non-gaming offerings.”

The local government has already spent years pressuring resort operators to invest more money in non-gaming activities—such as theater, performances, and fine dining—but managers are loath to comply because gambling yields higher profits than anything else. Yet refusal to comply might not be an option in the future. The new rules propose appointing government representatives to casino boards to “supervise” operations.

“We believe some of these measures will have an impact on the gaming sector’s business model, driving a structural change in Macao’s gaming revenue mix, pointing to a faster shift toward mass and non-gaming revenue, away from VIP contribution,” Morningstar analyst Jennifer Song said in a note on Thursday.

Appointing government overseers to the boardroom would be on trend for Beijing’s current power grab at private enterprises in mainland China, where the government has quietly acquired seats on the boards of major tech firms.

But the proposal that could jeopardize casino operations most in Macau is one regarding how many licenses the Macau government will grant next June, when the current 20-year licenses for the city’s six casino operators expire.

No concessions

Before Portugal returned Macau to Chinese sovereignty in 1999, the late casino mogul Stanley Ho held a 40-year monopoly on gambling in the region. But Ho had allegedly built his empire with the help of local gangs, and violence from the vice-ridden industry frequently spilled onto the streets.

When Beijing reclaimed sovereignty over Macau, the local government’s first point of order was to crack down on gang violence, break up Ho’s monopoly, and welcome fresh blood into the casino game.

In 2002, the Macau government granted casino licenses, called concessions, to Galaxy Entertainment, Wynn Macau, and SJM Holdings, a restructured entity belonging to Ho. Soon after, the government permitted each concession holder to sublease its license to one other “sub-concession,” bringing MGM, Melco Resorts, and Sands China into the fray.

All six of Macau’s casino licenses—the three concessions and the three sub-concessions—will expire in June next year, and the government has provided zero guarantees that the current concession holders will be granted a license again.

“It’s not a renewal process,” says Ben Lee, managing partner at Macau gaming consultancy IGamiX. “It’s open to everybody.”

When the current concessions expire, Lee says, all concession holders must submit entirely new applications and will be competing against bids from any other party that wants to acquire a license in Macau. Malaysian resort operator Genting, for example, already owns an undeveloped parcel of land in Macau and would likely apply for a concession next year.

Macau’s casino operators had hoped the government would grant an extension on the current concessions to compensate for disruption caused by the pandemic. Gaming revenue across Macau’s 41 casinos slumped 79% in 2020 as Macau’s borders remained closed to the outside world.

But the gaming regulator’s push to approve new regulations suggests the government will keep the June deadline. Worse yet for the operators, on Tuesday the gaming regulator proposed that the government “review the number of concessions allocated, and expressly prohibit the formation of sub-concessions.”

Feeling lucky

Despite the clear indication that Macau is reviewing the number of casino concessions available, which could cut the available licenses from six to three, some analysts remain optimistic on the outlook for operations in the Chinese enclave.

“We think it is unlikely that the number of concessions, which are due for renewal in June 2022, will be changed and that it remains likely that the current operators will retain their gaming rights,” Morningstar’s Song said.

Analysts at Bernstein likewise said, “our view remains that the six operators here today will be here tomorrow,” while Jason Ader, CEO of SpringOwl Asset Management and a former board member of Las Vegas Sands, told Bloomberg Tuesday it was unlikely a Western operator like Sands would lose its license.

The consensus that Macau will maintain the status quo is built on the idea that the government wants to preserve its revenue streams, most of which come from taxes on casino operators. However, the Macau government will continue to collect taxes from casinos regardless of which company, or how many companies, operate them.

When the concessions expire, the government automatically assumes ownership of all 41 casinos and the gaming equipment inside them, so that it can then license them out to the new concessionaires. Failing to “renew” a concession will cost the concessionaire much more than the government. Before the pandemic, revenues from Macau accounted for around two-thirds of global earnings for Sands and MGM, while Wynn earned almost six times in Macau what it did in Las Vegas.

Meanwhile, Beijing’s recent crackdown on its domestic tech giants demonstrates the government’s willingness to savage the market cap of private industry. Chinese tech firms have lost close to half a trillion dollars in market value since November, when regulators scuppered Ant Financial’s IPO days before its launch. Beijing likewise has no qualms about ousting foreign enterprises that don’t play by its rules.

“Half of the Macau concessions are owned by U.S. firms,” Lee says. “Given the fractious U.S.-China relationship over the last five years, why would Beijing leave Americans so in control of an industry that dominates the city’s landscape?”