ANALYSIS-Macau casinos deal themselves a tough hand with big non-gaming investment pledges

By Farah Master

HONG KONG, Jan 3 (Reuters) – As casinos in Macau begin
new licenses to operate in the world’s biggest gambling hub on
Jan. 1, the stakes are high on whether they will be able to
successfully deliver on a government mandate to diversify away
from their cash-cow: gambling.

For the last 20 years, Sands China, Wynn Macau
, MGM China, Galaxy Entertainment,
MGM China and SJM Holdings, have raked in
billions of dollars from their casinos in the Chinese special
administrative region, turning the once sleepy fishing village
into a glitzy boomtown.

But their 10-year, shortened contracts come at a time when
COVID-19 restrictions have decimated Macau’s gambling revenues,
with 2022 the worst annual performance on record. Industry net
debt is surging and operators face a new era of government
oversight and control over their operations.

The recent easing of coronavirus restrictions in mainland
China and Macau in December has also resulted in a wave of
infections across the city, including many staff.

UPPING THE ANTE

Casinos have committed to investing a total of $15 billion
in the coming decade, 90% of which must be spent on non-gaming.

But operators will find it hard to monetise their non-gaming
ventures given their poor track record since 2001, when the
former Portuguese colony first liberalized the industry,
executives and analysts said.

Non-gaming revenues, which averaged around 5% of overall
gaming revenues pre-COVID, must grow to more than 30% in the
next decade, said Ben Lee, founder of Macau gaming consultancy
IGamiX.

“For the past 20 years, none of the operators have managed
to establish any significant progress in non-gaming.”

“Contrary to the vaunted Las Vegas model, non-gaming in Asia
does not carry the same profit margin as spending behaviour is
quite different over here,” Lee said, while adding that Galaxy,
Melco and Sands were likely to fare better at diversifying based
on their track record and management team.

Macau’s visitors have traditionally been male gamblers
aged 30 and older, but more young families and women have
started visiting in recent years.

Macau, a densely packed territory located on China’s
southern coast, is the only place in the country where gambling
in casinos is legal.

In December, following the formal awarding of their
contracts, casinos unveiled non-gaming plans including indoor
waterparks, health and wellness centres, art exhibitions and a
large garden attraction by Sands, similar to Singapore’s Gardens
by the Bay.

KEY CHALLENGES

Macau’s current non-gaming attractions have focused on
retail and dining, with some entertainment offerings such as
Melco’s nightclubs, Galaxy’s cinema, Sands’ themed Venetian and
Parisian properties and its exhibition arena.

But it pales in comparison to Las Vegas, which boasts daily
entertainment and draws an international crowd. More than 90% of
Macau’s visitors are from greater China, prompting the
government to require operators to attract foreign tourists as
part of their new contracts.

New rules also stipulate that companies must routinely
submit to the government the progress of their investment
projects, the value of their investments and the execution
period.

Increased regulatory oversight comes as Macau casinos face
much higher debt levels versus 2019. Net debt increased
four-fold to $23 billion in 2022 and it may only peak by end
2023 at $24 billion, Morgan Stanley said in a December note.

Compounding casinos’ challenges, Macau lacks connectivity
with international markets, has dilapidated infrastructure and a
shortage of skilled labour, as well as reputational damage over
its COVID management, executives said.

Macau has few direct flights from potential markets outside
China, while transport within the city is limited to move large
groups of people around, said David Green, head of Macau gaming
consultancy Newpage.

“There is no indication that I have seen that the government
is, or intends to address these weaknesses. Given the serial
mismanagement of public works…it leaves concessionaires with a
less than optimal host attraction proposition.”

A lack of land also hinders further development, while
competition to hold conferences and exhibitions is rife from
cities like Hong Kong and Singapore and within China itself.

Alidad Tash, who worked as a senior executive in Macau’s
casinos since 2006 and now runs consultancy 2nt8, said the
biggest challenge for operators was that mainland Chinese
already have access to conventions, restaurants, shows and
shopping in their own cities.

“What they come to Macau primarily for is the one thing that
is not legally allowed within China: gambling.”
(Reporting by Farah Master; Editing by Kim Coghill)