As tensions rise and the U.S. – China trade war heats up, the one thing that is certain is that both parties want to see the Macau welcome bonus casino industry continue to do well. Macau is a gambling powerhouse which generates three times as much gaming revenue as Las Vegas and all sides have a vested interest in keeping the industry healthy.
There are multiple U.S. casino companies that operate casinos in Macau including Sands, Wynn and MGM. Some analysts say that since China’s goal is to make Macau into a diverse and attractive tourist destination, they are unlikely to take out their wrath over American embargos on Chinese products on the casinos. Other observers aren’t so sure. They say that the Macau casinos give China a valuable bargaining chip. Might China leverage those casinos in a game of brinkmanship?
Ace in the Hole
Tensions continue to rise between China and the U.S. President Donald Trump has “ordered” U.S. companies to leave China and both sides are warning of new rounds of tariffs ahead. Beijing may have an effective weapon of retaliation at its disposal – the Macau casinos, where the three U.S. casino operators must renew their licenses by 2022.
Sands China, Wynn Macau and MGM China are subsidiaries of U.S. parent companies. They are three of six corporations licensed to operate in Macau. They bring in a lucrative income – last year, Macau generated $37.6 billion in revenue. That compares to $11.9 billion in accumulated income generated on the Las Vegas strip in 2018. The three U.S.-run casinos account for an estimated 60% of the former Portuguese colony’s gaming total.
The Chinese ace in the hole in Macau involves casino licenses which are set to expire in June 2022. So far, there’s been no word from the government on renewal but everyone knows that the government could refuse to renew the licenses, which would put the operators at a tremendous financial risk. The operators had been expecting to receive a template for retendering the licenses, known as concessions, in 2018. However, once the trade wars began, the process stalled.
Ben Lee, managing partner at Macau gaming consultancy IGamiX says “It would make a lot of sense to use the concessions as a retaliation if Trump goes ahead and escalates the trade war. The outcome of the gaming concession retendering will be influenced and directed by Beijing and the trade war will factor very highly in the process."
When the U.S. companies entered the Macau market, the Chinese were agreeable. The casinos have expanded the Macau economy tremendously and China benefits from that as well. Macau had a gaming industry while it was still a Portuguese colony -- the Sociedade de Turismo e Diversões de Macau (STDM)-- which was headed by Hong Kong tycoon Stanley Ho. That company enjoyed a monopoly on the market but when the territory was returned to Chinese sovereignty in 1999, the new administration ended Ho's reign. The goal in reorganizing the casino industry in Macau was to rid the territory of the gangs, debt collectors and loansharks who had operated freely within Ho’s casino enclave.
The Chinese realized that in order to turn Macau into a welcoming tourist destination, they would need market competition and foreign expertise. The new Special Administrative Region of Macau started to grant concessions in 2002. They granted concessions to six new players, including Sands, MGM and Wynn. The Macau administrators wanted these operators because they had experience in developing family-friendly venues and international convention facilities alongside the casino gambling opportunities.
The Macau administration now finds itself in an awkward position, sandwiched between its Chinese rulers and the U.S. operators. Patrich Chu, chairman of the New Macau Alliance, one of Macau’s pan-democratic parties, says “I think some large operators will have no problem in renewing their concessions, but I’m concerned some smaller operators may have a problem in renewing their right.”
It would be a significant blow to any of the U.S. companies if they were to lose their Macau concession. The Macau casinos account for the majority of the operators’ gross annual income. Wynn Resorts, for instance, reported that its Las Vegas operations generated $170 million while income from their Macau operations totaled $978 million. The Sands China Macau operations accounted for 63% of the parent company’s total income in 2018.
The operators may be able to influence U.S. policy. Sands owner Sheldon Adelson contributed $25 million to a Super PAC that was dedicated to the Republican cause. Adelson has also contributed $10 million to a Trump campaign Super PAC. Former Wynn Resorts chairman Steve Wynn was the finance chairman of the Republican National Committee. Even though Wynn himself is no longer associated with the company, it can be assumed that ties remain which can give the companies an “in” with the Republican administration.
Macau’s Hidden Hand
For China, the dangers of letting the licenses lapse and losing the big casino operators are counterbalanced by the belief that there are plenty of small operators who are ready, willing and able to take over. One of them is the Malaysian resort operator Genting which has repeatedly expressed interest in opening a casino in Macau.
Lee agrees and says that the government will have no problem dealing with lapsed licenses. “The government will merely step in, take it over keep it running until such time as they find another party to take over the process. It’s not difficult and there is a clear-cut precedent in the public transport sector.” Lee is referring to 2014 when the Reolian bus routes company declared bankruptcy. The Macau government temporarily took control of the routes until a tender could be granted to a new operator.
The government wouldn’t lose anything if it fails to renew the leases. If concessions aren’t extended, ownership of the casino premises and the gaming equipment will automatically transfer to the Macau government. The resort operators could theoretically continue to run the hotels but wouldn’t be able to operate the gambling halls, leaving them little incentive to keep the hotels.
There is still nearly three years left before the casino concessions expire. Trump might lose the 2020 election, Congress might intervene or the Chinese might give into Trump’s demands. Nothing is sure so bettors should hedge their bets.