Legal changes broadly positive, but no cause for celebration

Steve Vickers & Associates, a corporate intelligence and risk mitigation firm with deep roots in Asia, is warning against irrational exuberance in the wake of the publication of Macau’s new gaming law.

An initial read indicated that the amendments were far more benign than doomsayers had been expecting after the government published its consultation paper in mid-September.

However, as always the devil is in the details and some of the details could prove to be problematic for long-term investors being asked to plough billions of dollars into the city.

It’s a theme that is repeated throughout the 44-page document and is also given as a reason over which the chief executive could unilaterally cancel a concession.

“THE FIRST STATED PURPOSE OF THE DRAFT LAW IS TO SAFEGUARD THE NATIONAL SECURITY INTERESTS AND THOSE OF MACAU.“

Unfortunately, the concept is vague and there is no detail as to what the government plans to focus on when it comes to national security and what it would consider to be a grave enough breach for a license to be removed.

“The major risk to gaming operators is not regulatory but is nakedly political,” Vickers says. “The primary factor which the Chinese and Macau authorities consider when evaluating concession renewals and new regulations is clearly the National Security criteria and whether, for example, capital flight can be contained, especially when linked to US operators seeking to repatriate dividends.”

The new laws didn’t in the end impose restrictions on the distribution of dividends, but did stipulate that the government needs to be informed before major financial transactions take place.

It remains to be seen what level of distribution they will find acceptable.

The Macau government could still act on dividend payments perceived as excessive, particularly if severe capital outflows from mainland China prompt national security concerns in Beijing, Vickers warns.

The amended rules also ban revenue sharing, both between junket promoters and operators and between the management companies and the concession holders, which Ben Lee of IGamiX Management and Consulting says appears to have a direct impact on how the U.S. operators charge for their services.

While many of these are flat fees, there are some that are calculated as a percentage of revenue. For example, Sands China has to pay Las Vegas Sands 1.5 percent of the gross revenue at the Venetian and its other properties for the right to use certain trademarks under the trademark sub license agreement currently in place, subject to a cap. That fee (for the Venetian, Sands Macau and the Plaza Macau) is capped at $128.3 million this year.

Also still in the vague column is how the operators will be expected to contribute to the healthy development of Macau, this includes supporting activities of public interest, as well as cultural and sporting activities.

To be sure, all six operators are already involved in corporate social responsibility projects in the city and have been key backers of the government’s efforts to promote vaccinations for example.

However, there is still room for concern that there may be clearer mandates on exactly what they are expected to do that don’t necessarily jibe with the way management feels company cash could be best deployed.

President Xi Jinping’s pet project is the development of the Greater Bay Area. Galaxy Entertainment and Melco Resorts & Entertainment have already announced plans for non-gaming facilities on the Mainland. However, is this an area into which a U.S. casino company wants to enter?

On the whole, the legal amendments as they stand appear to be manageable and for the most part provide clarity over the next stage of the industry’s development. But they’re probably not something to warrant investors jumping for joy.