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Worst May Be Over for Macau Casinos, but Challenges Remain

The Wall Street Journal · 01/07/2023 05:43

By Elaine Yu

HONG KONG -- Macau's struggling casinos are poised for a recovery, say analysts, with visitors from mainland China expected to surge after the country reopens its borders Sunday.

Longer term challenges remain as they face burdensome new operating licenses designed to finally cure the city's addiction to gambling.

The 10-year license renewals took effect this week, committing the six operators -- including units of U.S. giants Wynn Resorts Ltd., Las Vegas Sands Corp. and MGM Resorts International -- to plowing $14.83 billion into the city over the next decade, Hong Kong stock exchange filings show. Almost 92% of that is earmarked for developing non-gambling projects, including performances, conventions and sports events, as well as maritime tourism and fine dining.

MGM China Holdings Ltd. said its planned projects include a high-end "wellness center" and a collaboration to design shows between a virtual-reality company and celebrated filmmaker Zhang Yimou, who directed the opening ceremonies for the 2008 and 2022 Beijing Olympics. Sands said its plans included a proposed new convention center, redeveloping a site into a garden-themed attraction and a luxury yacht business. Wynn has yet to announce specific long-term projects.

The Macau government didn't respond to a request for comment.

For more than a decade, Beijing has said it wants Macau to diversify away from gambling, but there have been few obvious signs of success. This time, it aims to succeed by adding more government oversight along with financial incentives. For example, operators will pay higher tax if they fail to attract a bigger share of foreign tourists. Mainland tourists accounted for about seven out of 10 visitors in 2019. In addition, almost a fifth of visitors came via Hong Kong -- an hour's ferry ride away.

The following year, Beijing's Covid-19 travel restrictions turned the world's most profitable casino hub into a ghost town.

Visitor numbers plunged 99.5% in the second quarter of 2020 from a year earlier, official data show. Beijing's stringent zero-Covid policy, which guided the formulation of Hong Kong and Macau's strict rules -- largely sealed off the mainland and its two semiautonomous regions from each other for much of the past three years.

The following collapse in Macau's gross domestic product brought "into sharp relief" its overreliance on gambling, the International Monetary Fund said in April. The sector accounted for around half of economic output in 2019 and more than a fifth of all jobs, a figure that didn't include associated business such as hotels, IMF data show.

Gross gambling revenue in 2022 slumped by more than half from the previous year, and was lower than in 2005, the year after Sands China Ltd. opened the first of Macau's integrated resorts.

Recently, Macau's luck began to change. In November, Chinese authorities resumed a more convenient electronic visa for mainland visitors to the city. Macau awarded provisional licenses to the six casino operators, removing uncertainty. And soon after, Beijing abandoned zero-Covid.

Previous efforts to diversify faltered in the absence of coordinated policy support from the government, analysts said. Infrastructure, travel and immigration arrangements and the ability to hire skilled overseas workers, for instance, are beyond casinos' control. Wedged between mainland China's border and the sea, Macau may struggle to accommodate many more visitors, said analysts. Occupancy rates at its five-star hotels before the pandemic were more than 90%, government data show.

Without government guidance, casinos focused on the easiest and most profitable targets, said Ben Lee, managing partner of Macau-based consulting firm IGamiX.

"And the lowest hanging fruit is, first, gaming, and second, the mainland Chinese market," he said.

The IMF last year said skills shortages were a hurdle to four pillar industries Macau wants to develop: scientific and technological research, traditional medicine, conventions and exhibitions, and modern finance. The agency's analysis of Macau's labor force showed professionals, for example, accounted for 5% of jobs in the territory, not enough for the needs of those sectors.

After Macau opened its gambling sector to competition in 2002, casino operators poured billions of dollars into glitzy integrated resorts that helped turn the sleepy former Portuguese colony into global gambling's richest bauble.

Features such as The Venetian Macao's indoor canals resembling those of Venice and a figure-eight Ferris wheel embedded in a Melco Resorts & Entertainment Ltd. property have jazzed up non-gambling offerings. Luxury stores, shows and upscale restaurants helped too. The Rolling Stones, Beyoncé and Lady Gaga have all performed there.

Macau's image as a playground for the rich and triad gangsters has also shifted, driven in part by Beijing's antigraft campaign. Revenue from VIP gamblers, for years the biggest source of income, has dwindled as high rollers sought to maintain a low profile and amid a crackdown on junkets -- third-party agents that source VIPs. Alvin Chau, head of the biggest junket, was arrested in late 2021 and is on trial for alleged illegal gambling, fraud, money laundering and involvement in a criminal syndicate.

Casinos have instead turned to the growing -- and more profitable -- mass market segment. That might include visitors attending conferences, for example, who try their hand at cards or play the slot machines while they are in Macau.

Casinos made margins of less than 10% from junket VIPs, DS Kim, J.P. Morgan's head Asia gaming analyst, said in a report last month. By contrast, the mass market and slot machines yield a "very handsome" 35% to 40%.

Write to Elaine Yu at elaine.yu@wsj.com

(END) Dow Jones Newswires

January 07, 2023 05:43 ET (10:43 GMT)

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