As the ambitions of its gaming tycoons and the wealth of its casinos soared, Macau became a magnet for some of the world’s greatest chefs. And by early 2019, Michelin stars, which were showered on restaurants such as Sichuan Moon, the Tasting Room and Shinji by Kanesaka, were populating the city’s streets and casinos.
Its reputation as one of the region’s gastronomic powerhouses offered something the Chinese city yearned for: a reputation, beyond the baccarat tables and VIP back rooms, as a classy playground of the Asian middle class.
Almost three years and one pandemic later, such dreams have been severely dented. All three of those restaurants are closed. And Robuchon au Dôme — probably the most popular of the three-star establishments in pre-Covid times — has been without its head chef Julien Tongourian for nearly two years.
One top chef, who recently abandoned Macau, says that with just five or six diners a night, and stringent border controls under China’s zero-Covid policy which forced foreign chefs to stay in the city while also locking out most foreign tourists, the atmosphere was grim. Those who remain feel imprisoned. “One of the reasons that I left,” he jokes, “[is that] the money is not worth it for the jail time.”
Even its most stalwart cheerleaders say Macau — the world’s biggest gambling hub by revenues — is in a funk. And it is one, say casino executives, local business leaders, analysts, government officials and dozens of other Macau residents, that goes far deeper than just the misery imposed by the pandemic.
“Optimists will say this is a darkest before the dawn turning point,” says one veteran lawyer of recent moves by Beijing to rein in the city’s casino sector. “I think the best we can hope for is a reappraisal of what this city wants to be.”
Of concern is Beijing’s increasingly puritanical views on vice, which has invited regulatory scrutiny and made urgent a question that has long hung over some of the foreign casino operators: how long will their welcome last now that they have massively exceeded the scale originally envisaged for them?
But now there are moribund property prices in Macau, seemingly never ending isolation and a round of licence renewals for several casino groups due before June 2022.
The mood has been further darkened after Macau regulators shocked the market in September by unveiling a proposed amendment to gaming laws which, if implemented as drafted, would make the payment of dividends by the local and US-listed casino groups subject to Macau government approval. No criteria was set out for authorising dividend payments or how it would be implemented.
The law — which JPMorgan analysts said “planted a seed of doubt in investors minds” — would also involve those operating in the Chinese territory having a representative stationed inside their companies. While there are few details, existing Macau legislation provides for such representatives to have power to attend board and shareholder meetings.
The proposal also suggests casinos increase the shareholdings held by Macau permanent residents. A speedy public consultation has ended and business is waiting for the final law to be put to the legislature, a process that is also expected to determine how many of the casinos have their licences renewed, and for how long.
The situation is particularly troubling for the three Macau casino groups that are largely US-owned: Las Vegas Sands, founded by the late Sheldon Adelson, MGM and Wynn operate nine resorts in Macau, and their local subsidiaries are listed in Hong Kong. Local operators Galaxy Entertainment, the late Stanley Ho’s SJM Holdings and Melco, which is dual-listed in the US and Hong Kong, also hold concessions.
Analysts say the proposed supervision of dividend payments is a sign China wants operators — for whom Macau is a critical part of their business — to invest more locally.
“They want casinos to help the economy, and small to medium-sized businesses, rather than stripping the money out [and sending it] back to the United States,” a senior casino executive says. “They want to take a greater interest . . . have greater control.”
It is not just the political environment that is troubling executives. Some wonder if the mass tourism business model adopted by the big operators pre-pandemic may be larger than the market can absorb.
Pre-pandemic Macau had invested billions of dollars to accommodate millions of visitors per month, to build a more solid pipeline of profitability through mass market tourism — as opposed to just serving high rollers — and to expand the offering beyond gambling.
It has invested, say some observers, for a peak that may now never come.
“China has already made it abundantly clear that gambling is a vice through a series of anti-gambling edicts,” says Ben Lee, an Asian gaming expert at Igamix Management and Consulting. “In terms of easy money for the foreign operators, it seems that Beijing is looking at controlling the previously unconstrained ability to repatriate profit and funds.”
Will industry heyday return?
Macau’s revenues overtook Las Vegas in 2006, but for investors attracted to the gambling hub there have been a lot of ups and downs since then. President Xi Jinping’s 2014 crackdown on corruption targeted Macau as an exit route for vast sums of money that had found its way into the hands of corrupt officials. The clampdown on such capital flows continued for longer and with more ferocity than many expected, forcing the city to embrace the idea that its future lay in the mass market.
The gradual post-pandemic return of visitors from the Chinese mainland has been welcomed. But they are not yet coming back in the numbers needed to reignite Macau, whose remarkable growth story saw it rise from a sleepy former Portuguese colony to the most valuable gaming centre on the planet in less than two decades.
Daily gross gaming revenues for the first three weeks of November, say Citigroup analysts citing industry sources, were running at roughly $30m per day; average daily visitors at 26,000; gaming volumes in the critical mass market were up 55 per cent month on month. All broadly encouraging, but, in the case of gross revenues, a far cry from the $100m daily average Macau enjoyed when it was building its constellation of Michelin stars in 2019.
“The bigger picture is that there are fewer guests with limited cash flow. The economy is bad, the pandemic is ongoing, [and] regulations are becoming more stringent,” says Kwok Chi-chung, chair of the General Association of Administrators and Promoters for the Macau Gaming Industry, which represents more than a dozen junket operators — middlemen who introduce high-spending gamblers to individual casinos. “How can the industry [ever] go back to its heyday?”
That question was posed again after the Macau regulators announced their new draft gaming law and $20bn was wiped off the combined share prices of the casino groups in just one day. A string of bad news has followed. The hugely influential index maker MSCI said — without giving any reason — that SJM and Wynn Macau would be dropped from their Hong Kong Index on November 30. The uncertainty hanging over the sector prompted a high-profile bet against the long-term prospects of Wynn and Las Vegas Sands by Jim Chanos, the celebrity investor who notoriously short-sold Enron shares before its 2001 collapse.
The new gaming law proposal came just as casinos’ profits had been savaged by the pandemic. The territory adopted China’s strict zero-Covid approach to minimise border closures with the mainland, where the vast majority of the city’s gamblers come from.
The move has shut out international tourists and visitors from Hong Kong who had accounted for as much 20 per cent of annual casino revenues, according to brokerage Sanford C Bernstein. Then, just before the annual “golden week” national holiday in October — which traditionally provides a huge boost to casino revenues — a handful of Covid-19 cases in Macau led authorities to reduce the flow of tourists again, this time to a tiny trickle.
The regulatory storm could not have hit the industry at a worse time, Pedro Cortés, a Macau gaming law expert, says: “The [casinos] are suffering a lot . . . They would have more power in a different economy,” he adds.
Follow the money
The authorities in Macau rely on the gambling sector for taxes to cover the city’s public finances, but many fear Beijing has a fundamental suspicion of the industry. The new gaming law was announced after Xi launched his “common prosperity for all” policy ostensibly to bolster consumer rights and appeal to the middle classes.
The policy saw all sorts of big businesses, including those in video gaming, come under pressure: accused of not being in line with state goals. Some question where the core casino business will fit into this new Beijing rhetoric.
Beijing had already signalled its hostility towards casinos by introducing a law in March 2020 that outlawed marketing to attract potential gamblers inside China. This struck at the heart of Macau’s notorious “junket” industry — which is built on luring high rollers from the mainland to the casinos. As part of the deal they extend credit to the gamblers once they arrive in Macau.
Casino earnings from high rollers had been in decline even before the pandemic, making up 46 per cent of total revenues in 2019. And the number of registered junkets was about 90 at the start of this year, down from more than 200 in 2013, according to Macau’s gambling promotion industry group.
“The question is, can the amount of growth in mass market gambling make up for the amount of junket loss?” asks a sceptical gaming industry executive in Macau.
The city’s casino revenue was split nearly 50-50 between mass market and VIP before the pandemic, says Hoffman Ma, an executive at Success Universe, an investor in SJM’s Ponte 16 resort. But even if tourists and gamblers return in numbers to Macau, under the new regulations, revenues from VIPs may not fully recover.
Sonny Lo, author of Casino Capitalism, Society and Politics in China’s Macau, says Beijing’s moves were driven by concerns around the use of the casinos for capital flight by some high rollers.
“China is attaching importance to Macau’s economic security . . . and [in Beijing’s eyes] casinos should not be used as a conduit for money laundering or used to channel treasures out of Macau,” Lo says. Macau’s gaming regulator has also seen organisational changes over the past few years, with an influx of staff with a national security background.
There is also concern among operators that Beijing will encourage the use of digital renminbi in casinos, which would mean all transactions are tracked. The city’s de facto central bank has signalled that it intends to roll out trials of the digital currency. That could deter mainland Chinese tourists who may fear official repercussions should they be found to be making large bets. “In the longer term, talk of the digital Rmb could stem the flow of money to Macau,” the gambling executive says.
Chinese citizens, who are only officially entitled to buy $50,000 in foreign currency a year, have traditionally been attracted to Macau and Hong Kong as their currencies are in effect pegged to the US dollar.
Despite this gloomy picture, says a senior executive at a US casino group, operators believe that within reason, Beijing will ultimately see Macau as a necessary evil. “The alternative to having a controllable, observable hub in Macau from the Chinese leadership perspective is to have it illegal and unobservable everywhere across China, and they don’t want that. They want the safety valve here,” says the executive.
But they also want operators to take on more social responsibility. During the pandemic casinos kept most of their local staff on the payroll despite their empty floors and authorities are now turning the screws on operators to invest in non-gaming businesses, which could be lossmaking. “It will be costly,” a gaming industry executive says. “Casinos will have to make commitments to more non-gaming investment. There will be a whole lot of things they have to commit to in order to have their concessions renewed.”
Mainland authorities are particularly keen to see casinos invest in the “Greater Bay Area” — a series of mainland cities which ring Hong Kong and Macau in the Pearl River Delta that Beijing hopes to develop into a technology and services hub. Galaxy Entertainment Group has said it intends to build a resort in Hengqin, while Melco has announced an investment in a non-gaming resort in Zhongshan. Both cities are across the border in Guangdong province.
It is the fate of the US-owned casinos that has raised most concern for executives, considering the tone of the new law. It does not necessarily indicate Beijing intends to eliminate foreign casinos, but with US-China tensions high, they may want mainland companies to take a greater stake in the American businesses, according to Elio Yu, associate professor of government and public administration at the University of Macau. “One [thing that] is quite clear is that the environment is not favourable to the foreign casinos.”
US casino executives were cheered by Ho lat-seng, Macau’s chief executive, when he floated the option of a one-year extension of all casino licences in November if the gaming law is not finalised before they expire in June 2022. The government has declined to confirm the length of any new licences — which were originally granted for 20 years in 2002.
“Is it going to get incrementally a bit tougher for the foreigners? Maybe. But while there is a necessary amount of lip service paid [by operators] to looking concerned and serious, I think that the basic feeling is that everyone currently operating more or less gets to carry on doing that,” says one of the executives.
Macau is critical to the US groups’ businesses. Las Vegas Sands is almost completely relying on its Asia properties for growth after it sold its interests in Nevada in March, while 47 per cent of Wynn Resorts’ total operating revenues came from their Macau business in 2020. And they have long used the profits from their Macau operations to fund their businesses across Asia.
“Macau was kind of the ATM,” says an Asia-based casino executive, “and the [casino groups] knew they would always have enough cash flow to fund whatever they were thinking about elsewhere in the region.”
The Macau regulators may be about to set a new limit on those ATM withdrawals.