st-pauls-ruins  Not So bright a 1st Quarter… for Macau

             by Expert IR


  (Sources from the news… 20th April 2009)


  It was reported in the news that Macau’s casino/gaming revenue for the first quarter of 2009 increased    by 8% overall against 4th quarter of 2008. The figures reported are as follows:




  • First quarter 2009    Mop26.2b (approx. USD3.3b)
  • First quarter 2008    Mop24.8b (approx. USD3,1b)


Based on the reported figures above, it works out to about merely 6.5% increase in overall gaming revenue from the 4th quarter of last year. But what is more interesting and of concerned would be the revenue for VIP Baccarat (high-rollers, junket operations), indicates a drastic drop of 19.1% compared with first quarter 2008. Quarter on quarter the gaming revenue dropped by 12.8% compared to first quarter 2008.


If I were to recall a few years ago, with professional investment analysts praising the Asia’s Las Vegas (in Macau) project, had projected its dreams stretching into the stratosphere. Some heavy weight investment research firms had concluded and projected the following ‘conservative’ growth figures,


l          Mass gaming revenue growth by CAGR of 27% all the way till 2012.

l          VIP gaming revenue growth by CAGR of 9 – 12% all the way till 2012.


In hindsight, we are more sober now thanks to current economic crisis that wakes us up from the dreams. In most cases, investors tend to relate the phenomenon of mainland Chinese’s casino gambling habits in Macau as the absolute yardstick for casino resorts investment in every part of Asia. What this perspective means is, people were holding too simple a mindset on return on investment for gaming industry, resulting in very loose and abundant credits and relatively easy asset gathering process for funding of casino resorts development in Asia.


As this is not an investment report, so I could adopt a more ‘freehand’ style in discussing several issues that I have identified for better understanding of Macau’s unique status and why I would think that the ‘gaming pie’ will not keep growing as those professional money people wish for. Sorry for that.


What Is This Macau Phenomenon?


The liberalization of casinos in Macau is not a wishful thinking that many western casino investors thought to be – to free up Stanley Ho’s hold on the territory, allow a fair play in gaming industry and introducing international gaming standards into Macau. Or simply put, ‘now you Las Vegas casinos can come in to make your monies from mainland Chinese; and by the way, offer jobs to the locals”. 


In essence, the above wishful thinking is completely wrong. That I don’t even need to explain to you guys. The policies introduced on Macau by the Chinese Central government in Beijing in the last few years (since end of 2005) would clearly tell us, ‘look guys, I won’t chop off the whole arm and give that to you; but maybe some blood transfusion from time to time can be arranged.’ Indeed, this is the exact words spoken to me (of course it was in mandarin) when I met up with a senior Chinese official two years ago, in Macau. By then the Central government had already acquired a good assessment of the pros and cons of liberalization of casinos in the territory. Simply put, they firmed up their conclusion and also their mind.


So what exactly the phenomenon Macau is creating? This can be examined from a few dimensions, as follows.


From a broader strategic view, Macau is no different from Hong Kong, it has to be successful in its social and economic development based on the late Mr. Deng Xiao Ping’s One Country – Two Systems evolving concept and, be a powerful window-display that showcases to Taiwan. This is a noble mission (for China) and a great concept put in place by the Communist Party of China.


Economically, yet Macau is so different from Hong Kong., without like Hong Kong a much stable, well developed society that boasts international trades and financial centre based on balanced economic structure. Macau has only the casino. So in 2002 when the legislative law was put in place to liberalize the gaming industry, it was to rely on gaming as the prime-mover to attract large scale direct investment into the territory. The Chinese government would think that within 5 – 10 years time Macau will succeed in developing for itself a more balanced industrial structure with diversified economic outputs. Hence, allowing Macau to better integrate into the larger Southern China economic region (the 9 + 2 development concept).


The rest is history.

From late 2005 onwards Chinese government had introduced several restrictive measures to start limiting the rampant outflow of illegal RMB (Chinese Yuan), said to be of at least RMB600b a year by end of 2004! The restrictive policy also aimed to take control of growing cases of corruption by its officials who ‘transfer’ their monies into the territory with a clear purpose. Since then, Chinese government has continuously monitored the situation in Macau, especially on its impact to Guangdong province (next to the territory).


As at to date such restrictive measures have been further adjusted to impose more limiting rules for mainland Chinese traveling to Macau, including via Hong Kong. Now on average mainland Chinese could only visit Macau once every three months and more stringent on multiple- business trips based on the free individual travels (FIT) scheme. Junkets are affected as badly as mass visitors.


It is interesting to try interpreting the Chinese government’s long-term intention for this Macau phenomenon. My take would be,

l          The imposed restrictive policy for mainland Chinese traveling to Macau will stay as a long-term control measure. The ‘tap’ may open slightly or tighten up depending on Macau’s social economic factors and ongoing development.

l          The abovementioned ‘No chopping of an arm (for Macau), but blood-transfusion’ approach seems to be highly indicative of what the Chinese government’s baseline.

l          The free & easy management approach would not be suitable for Macau in today’s circumstances; proven by increased unhappiness and frustration of its population, through open demonstrations and marches on the streets. VIP and even mass gaming activities that impact on the society will continue to be tightened up, especially on junket operations that extend its network into mainland China.


Guangdong’s Shift in Its Economic Platforms


The re-charting of Guangdong’s economic development blueprint is a major milestone for Southern China region. Essentially, Guangdong is planning to transform its major economic activities from a low-cost manufacturing region to a higher value-add base. Instead of overwhelmingly relying on exporting to the Unite States and other parts of the world, Guangdong will evolve to be an economic prime-mover for neighboring provinces, emphasizing on services and capital market revamp. The long pending cross-sea bridge that links Hong kong, Zhuhai and Macau will be part of this grand 9 + 2 Southern China region initiative.


What does all these means? I would attempt to contribute my thoughts on a strategic map in the context of Asia’s Las Vegas – Macau. With all that has been mentioned with regard to Macau’s growth potential, let me put in perspective as follows.


l          That Macau SAR would not be allowed to steer itself fully based on casino investors’ (and creditors) interest and profit margins. First thing first, Macau is to serve a noble goal of One Country – Two Systems.

l          That the current state of VIP/junket gaming business (65% of total gaming revenue) in Macau will come under greater control by the Chinese government. Overwhelming junket activities and market share (huge credit and illegal transactions etc.) will ultimately destroy the much needed stability of Guangdong province, at the door step of the territory. Especially when Guangdong is in the shift in its economic platforms and moving towards developing a sustainable capital market mechanism to fund new businesses, in the province and also, Southern China 9 + 2 region. When push comes to shove, something has to go. As a matter of fact, junket operation is becoming more and more difficult in Mainland China under surveillance, coupled with increased credit risk. (Unless casinos are willing to share the risk).

l          It was reported that at least 10,000 or more factories in Guangdong has packed up and called it a day with more to join in the line. The next few years will see Macau’s VIP gaming revenue continue to be greatly affected. Personally I would think that the 19% drop in the 1st quarter 2009 for VIP Baccarat revenue is still not the bottom pit yet.  


Some Singaporean friends who asked me whether the Singapore IR would flourish in VIP gaming market because of Macau’s huge success in the high-roller business apparently (i.e. with 65% VIP gaming revenue compared to mass market revenue).

Seriously speaking, VIP gaming (or VIP Baccarat some like to call it) growth equation is heavily weight on the two Cs, namely Credit & Collection (risk). While those in the Asian casino industry would clearly knew that non-negotiable chips rolling program remains very volatile business for casinos. The mitigating factor is to mainatain consistent high turnover.

Even with a much lower tax regime, junket commissions will still go up to take a big chunk of win. The logic is simple enough, junkets have to continuously fuel the credit portion (to players) in order to maintain consistent high turnover every month. So junkets’ credit risk starts to mount over time, unless the junket has superior collection power, then someday and someone has to compensate his risk exposure by giving higher and higher commission or sharing (a % of) the credit directly with junket operators. In order that casino can sustain VIP business through consistent high turnover. (Those who manage VIP gaming would know what I mean, the theoretical win for non-negotiable rolling chips is as low as 2.7%, in reality, that is not too far from that).

Same for direct high-rollers, if casino does not provide chip credit facility after sometimes, then out they lose the players (to competitors or to the junkets willing to provide credit facility). So the equation is simple as that.


Singapore is not Macau; just like Macau is not Hong Kong. Each has its own advantages and limitations imposed by external environmental factor, social economic (& wealth distribution), policies and culture. I could only try to speculate, that Singapore IR will remain as much a mass market in the gaming arena.

Is there anything wrong with that?




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