Investment banks are forecasting a slowdown in the Macau casino market following the economic slowdown in China, resulting in reduced cash flow.
Shares in all six casinos in the territory have fallen sharply since July 2018 amid economic uncertainty and possible policy shifts. The US-China trade war is escalating, and there is the potential for all trade between the countries to become a point of political contention. Bankers and fund managers are keeping a close eye on the government’s approach to casino licenses for US companies that are operating in Macau.
Geopolitical fault line
Three of the six casino operators in Macau are US-owned as it stands, and it is the only area in China where gambling is legal. Wynn Resorts operates Wynn Macau, the Venetian Macau is owned by Las Vegas Sands, and MGM China is operated jointly by MGM Resorts International and Pansy Ho Chiu-king; the US-based MGM Resorts International owns a 56 percent share in the outpost.
These casinos could be a way for the Chinese government to target US companies if they are looking for further ways to affect trade between the countries. The chief executive of Steve Vickers & Associates, a Hong Kong-based risk consultancy, said: “The US-owned Macau casinos are sitting on what could be called a geopolitical fault line. First, one of the main Macau casinos is the largest donor to the United States Republican Party and, thus, directly to President Donald Trump’s party finances.
“Second, the casinos’ long-term Macau concessions are being reviewed – unfortunate timing – and these key decisions as to renewals will be made in Beijing, not Macau. Third, the arrest of the Huawei executive recently may be seen by some in the Communist Party as a personal attack on the leadership elite.”
Each of the operators has casinos in the territory and they benefit from licenses that are valid to either 2020 or 2022. MGM China’s license expires on March 31, 2020, while Las Vegas Sands and Wynn Macau’s licenses expire on June 26, 2022.
Vickers added: “To date, the Chinese have been quite careful not to escalate the conflict into a direct assault on US interests. But it remains to be seen what the current attitude is towards Macau and the huge cash outflow associated with the large US casinos.”
Stock markets worried
Gambling operators have been able to make big money in Macau since their launch in 2001, and China certainly sees it as something of a cash cow. Home-grown tourists often spend big money when traveling to the only area where gambling is legal in the country. The question is now whether US companies should benefit from the boom in income. As Vickers said, “the Chinese leadership has cause to ask whether to allow American companies such a boon, particularly given the strong and very visible ties between one or two of the gaming tycoons and President Trump.”
The stock market has reflected the concern about the gambling sector’s future in the area over the past few months, with the economic slowdown in China impacting disposable income for visitors to spend in Macau’s casinos. Morgan Stanley cut its 2019 forecast for the sector by 7% to just 5%, and Deutsche Bank issued a report predicting a 5% drop in Macau gambling revenue as opposed to a previous prediction of 4% growth.
Growth in the market has slowed down since April 2018, it reached $3.1bn (£2.5bn) in November, up 8.5% year on year, but down 8.5% compared to the previous month. The current chief executive of Macau, Fernando Chui Sai On, said the government is “actively working on” terms for a new licensing system for casinos operating in the territory. This comes as the city’s secretary of economy and finance, Lionel Leong, was saying that “the development of the gambling industry concerns China’s national security and the overall interest of Macau.”
