SVA Assessment - Macau and the New Gaming Law - Politics Trump Regulations

The Macau Government provided more detail as to its forthcoming gaming law, in a much-anticipated press-conference, on Friday 14th January 2022.

The initial industry reaction to the announcement was favourable in that some rumoured changes did not materialise and, more generally, concession holders felt the new arrangements may not be as burdensome as previously feared.

Market reaction

This initial industry optimism was matched by gaming shares sharply rising, with Las Vegas Sands and Wynn Resorts shares increasing by more than 10%, and MGM by 4%.

Of course, in reality, Macau’s gaming sector remains much subdued, due to ongoing and onerous covid restrictions and more recently, direct action against junket operators. Recorded revenues were US$7.5 Billion in 2020 and $10.8 Billion in 2021, a far cry from over US$40 Billion in 2013.

Political risk

The major risk to gaming operators is not regulatory but is nakedly political. 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.

Investors should take all such risks into consideration before being swept up too far in the current market euphoria. The new law includes operational obligations, demands to assist with “healthy development” and other non-core business factors unfamiliar to foreign operators.

Understanding and being able to gauge political risk has never therefore been more important in this respect.

The law

The new law will set up a clearer framework, by capping the number of concessions at six. The statement also made clear that such concessions cannot be transferred to others – ending the “sub-concession” system, the uncertain legal basis of which had long raised eyebrows.

The concessions will now be set at 10 years, with a possible extension of three years – shorter than the current 20 years. The reduced timeframe could deter investment, particularly in the second half of the term, but should be manageable for investors, if the incumbents win new concessions.

What the law did not include, though, was rules mandating the appointment of government representatives, nor did the law outline specific restrictions on dividend payments – both of which the government had considered in public consultation. The law will also not alter the tax regime (circa 40%). As such, on the surface, these measures do seem less restrictive than feared.

Of course, investors should expect some tinkering. A new limit will be implemented of 30% of shares that are publicly listed for a concession-holding entity. The law will also phased out “satellite” casinos (essentially hotels operating a casino on behalf of a concessionaire); with a three-year transition period. Macau currently has 18 such satellite casinos, fourteen of which are under SJM’s control, three under Galaxy and one under Melco, with assets of circa USD6.2 billion.

The tenders

In the interim, statement have not yet provided clarity on the upcoming tender process. The existing concessions will end in mid-2022, but a new tender by June 2022 currently seems unlikely. Rather, a more realistic timeframe might be later in 2022, or even in 2023, meaning that the government would have to extend the concessions.

Moreover, the statement provided little detail on how the tender will operate, nor as to which businesses might be encouraged to tender. The incumbents seem the obvious applicants, but investors should be mindful that geopolitical tensions are high, and liable to rise. Macau’s government may favour domestic champions, or at least demand changes in ownership structure to foreign controlled entities which may be problematic for them. Therefore, not all current concessions may survive the process.

Devil in the detail

Also of note were operational provisions, and mention of punitive measures available to the authorities.

The new law seems likely to restrict any sharing of revenues with junkets, for instance, making clear that the industry’s reliance on junkets to provide VIP gamers is coming to a close, as has the arrest in September 2021 of Alvin Chau Cheuk-wah, Chairman of Suncty Group, Macau’s biggest junket. These measures will probably curtail short term growth, as a reliance on junkets (and hence triad associates) had hitherto underpinned VIP gaming and illegal capital outflows from the Mainland.

The statement’s mention of social responsibilities is also of note. Such provisions have long existed, but previously were not unduly burdensome. Now, though, they seem sure to strengthen, given the doctrine of “common prosperity”, in mainland China, which seeks to limit income inequality, and is forcing private sector businesses to raise their charitable contributions.

Of greatest importance, though, is the emphasis on national security, which will trump all other concerns, and thus pose heightened political risks to foreign investors. The prior proposals on limitations on dividends are also worth considering in this context. 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.

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SVA stands ready to assist with services aimed at mitigating such risks, including by conducting risk and threat appraisals, by carrying out investigative due diligence of partners, and by providing assistance for companies with political or regulatory problems, including matters related to fraud and other financial crime.

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