Last Friday I remarked that the strong year-on-year gains in casino “win” (the amount lost by gamblers, which is much smaller than the amount bet) for the SAR in July have to be taken with a grain of salt. That’s because many Chinese gamblers decided to stay away from Macau during the run-up to the late 2012 leadership change in the Communist Party. Why ask for trouble, they thought.
So far, August is shaping up as a clone of July.
On to the “other stuff” that I was too rushed to get to last week.
1. the economics of mass market vs. VIP
So far the story of gambling in the Macau SAR has been about high rollers playing baccarat. Gradually, though, and with a lot of prodding by the government, mass market gambling–particularly in newer casinos in Cotai–is starting to develop. This has important profit implications for all the publicly traded casino stocks.
Consider two examples:
A. one high roller…
agrees to bet a minimum of US$3 million over a two-day stay in Macau. He loses 3% of the amount bet. The hosting casino wins US$90,000.
B. 45 mass market players…
each bet US$10,000 over a two-day stay. They average a loss of 20% of the amount bet. The hosting casino wins US$90,000.
Catering to group A is a very different business from catering to group B.
One obvious difference is that you need a lot more hotel rooms to house the mass market players (on the plus side, many of them will likely be paying for their accommodations). Also, unlike Group A-ers, Group B-ers won’t be holed up in a private room all day gambling. They’ll want to walk around with their companions, see shows, go shopping, eat in nice restaurants. Therefore, to get them to come to Macau–and to get them to come back–casino operators have got to have very substantial non-casino operations.
That costs money. The good news is that Group B is also more than happy to pay for entertainment, too. In fact, the history of the Las Vegas strip shows that the non-casino entertainment business there grew from next to nothing a generation ago to a profit center equal in size to gaming operations by the early days of this century. Although Hong Kong investors don’t seem to believe this, I think the same process is well underway in Macau.
After Macau reverted back to China from Portuguese control, the new SAR granted casino licenses for 20-year periods. For SJM and MGM China, their licences expire in 2020. For everyone else, it’s 2022.
Casino companies are reporting that Macau has recently opened negotiations for license renewal. This comes several years earlier than the market had expected.
Why so soon?
I think it’s because the government’s bargaining position weakens with time.
If it waits until, say, 2018 to negotiate with SJM, which controls almost a third of the gambling market, who has the upper hand? The government can shut SJM down. But that would throw a whole lot of people out of work and punch a gigantic hole in the government budget. There are, of course, any number of casino operators chomping at the bit to get into this market who would be willing to replace SJM. But it would take years for any of them to acquire land and build casino complexes–and that’s assuming there’s suitable land available for development.
Come to an impasse in 2015 instead and there’s still lots of time for Macau to tweak the capacity addition plans of other casino companies and find a new entrant before the old license expires.
Looking from the other side of the negotiating table, the minute the government announced non-renewal of a license, I’d expect the affected company’s business would immediately collapse.
To be clear, I don’t expect any of this “nuclear option” stuff will ever come into the foreground of negotiations, much less happen. But the threat to a recalcitrant operator still exists, even if it’s unspoken.
One other thing: if I were Macau and anticipating I might be forced to alter the license of a single casino firm in a negative way, I’d want negotiations with all the others to be settled favorably and announced to the financial markets before I took action. That way I could make it clear that the government was disciplining a rogue, not taking arbitrary and crazy action against the gambling industry as a whole.
All in all, I expect license renewal to be a non-event. But the process is worth keeping an eye on.