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Monday, February 2, 2015

Corruption Crackdown




Macau Faces Biggest Test as Corruption Crackdown Hits Hard

Chinese Gambling Hub Struggles Amid Construction Boom

 
 
Pedestrians cross a road in front of the Venetian Macao resort and casino, operated by Sands China Ltd., a unit of Las Vegas Sands Corp.         
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Pedestrians cross a road in front of the Venetian Macao resort and casino, operated by Sands China Ltd., a unit of Las Vegas Sands Corp. Photo: Bloomberg News
 
 
By
The “build it and they will come” strategy that has earned billions for casinos in Macau is facing its biggest test yet as a construction binge in the Chinese city bumps up against plummeting revenue.
Analysts and investors are questioning the strategy amid Macau’s worst-ever downturn. The Macau government reported Monday that January gambling revenue in the territory fell 17% from the same period last year to 23.75 billion patacas ($2.97 billion). The decline follows December’s record 30% drop and extends a dramatic eight-month losing streak that ended five years of uninterrupted growth. During the slump, share prices of Macau’s six Hong Kong-listed casino operators have fallen an average of 34%.
Meanwhile, casino operators are in the middle of a $23 billion spending spree on new projects that are set to open in the next few years, according to Union Gaming Research, an industry research firm. The city is expected to add 62% more gambling tables and 51% more hotel rooms by the end of 2017, Union Gaming says.
The decision to invest was made when Macau, a $44 billion market that still rakes in seven times more gambling revenue than the Las Vegas Strip, was growing by the size of the Strip each year.
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But the world has changed since those plans were made. Executives and analysts attribute Macau’s sharp reversal of fortune primarily to a crackdown on corruption led by China’s President Xi Jinping . In addition to bringing down many top mainland officials, the sweeping campaign has scared off highrollers and decimated the city’s junket system, they say.

The number of Macau-registered junket operators—middlemen that use underground banking networks to facilitate high-stakes gambling—dropped 16% in January from the previous year to 183 from 217, according to official data released last month.
A laundry list of other challenges has also affected Macau’s lower-spending but higher margin mass market customers including tighter visa policies for mainland Chinese visitors to Macau, increased oversight of UnionPay cards many gamblers use to access funds in Macau and new smoking restrictions at casinos.
All of this has put pressure on margins and forced casino operators to re-evaluate costs. Las Vegas Sands Corp. , the first Macau casino operator to report fourth-quarter results, said it now was looking closely at costs. “We’re charged with running our business more efficiently, examining all layers of cost…But this has been a sea change, as you know, in a very short period of time,” said Sands President Rob Goldstein on the company’s earnings call last week.
Declining revenue isn’t the only problem for expansion plans. Casino operators remain hamstrung by the Macau government’s tight control over the supply of both labor and gambling tables. At the same time, leaders in China and Macau have made it clear casino operators need to invest significantly more in nongambling facilities to further their goal of transforming the city into a diversified entertainment hub.
Signage for the Wynn Palace project, developed by Wynn Resorts, displayed on a fence outside the construction site in Macau on Jan. 12. ENLARGE
Signage for the Wynn Palace project, developed by Wynn Resorts, displayed on a fence outside the construction site in Macau on Jan. 12. Photo: Bloomberg News 
      
It is unclear, however, what the demand may be for such offerings in the only place in China where gambling is legal.
            
Galaxy Entertainment Group Ltd. and Melco Crown Entertainment Ltd. , which each say they will open expansion projects this year, highlighted planned nongambling elements at their resorts at news conferences last month.
Martin Scorsese directed a short film starring Robert De Niro, Leonardo DiCaprio and Brad Pitt to promote Melco Crown’s new Hollywood-inspired resort, which will also feature a Batman virtual-reality ride and what is being billed as Asia’s highest Ferris wheel “inspired by having two asteroids shooting through a Gotham City building,” according to a statement from the company.

Galaxy’s expansion plans include a 3,000-seat Broadway-inspired theater, a mall with more than 200 shops and what was described as “the world’s longest skytop aquatic adventure river ride.”
But visitors to Macau have so far been much more interested in gambling than in other forms of entertainment. In response to a question about whether there would be enough demand for all the new theaters and arenas coming to Macau, Galaxy deputy chairman Francis Lui said: “My short answer is: not right now.”
Union Gaming analyst Grant Govertsen, who recently upgraded the sector to “Buy,” took a contrarian view on the building boom: “At today’s stock prices you’re basically getting it all for free.”

 
 
 
 
http://www.wsj.com/articles/macau-faces-biggest-test-as-corruption-crackdown-hits-hard-1422856496
 
 
 

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