Casinos place new bets as China gamble sours


Casinos place new bets as China gamble sours - 12th November 2015

 

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Lawrence Ho, left, on the red carpet before the opening ceremony of Studio City and the premiere of the short film "The Audition" in Macau, on Oct. 27, © Reuters


By HAMISH MCDONALD, Contributing writer

SYDNEY -- When Australian gambling tycoon James Packer and his Hong Kong partner Lawrence Ho opened Macau's newest casino in October, they made clear they were happy to be meeting the wishes of China's leaders for more family-oriented tourism in the fabled "Monte Carlo of the East".

Their $3.2 billion resort, Studio City, is full of attractions based on Hollywood cartoon classics. Packer'scompanion, the American singer Mariah Carey, sang, while Brett Ratner, his partner in movie production, showed a 15-minute promotional film featuring Leonardo DiCaprio, Robert De Niro and Brad Pitt, directed by Martin Scorsese.

Behind the scenes, though, Packer and Ho were disappointed. Instead of the 400 gaming tables they were expecting to operate -- until a few days before opening -- the Macau authorities permitted just 250. The partners were forced to enter into negotiations with their lenders and two U.S.-based investment funds that own a 40% share in the project.

Rival casino owner Steve Wynn, who will open a new casino in Macau in March, said it was "preposterous" that Packer and Ho could discover their table limit only days before the opening.

After more than a decade of permissiveness, China is trying to moderate a gambling frenzy in the former Portuguese colony, which returned to Chinese sovereignty in 1999 as a "special administrative region." As a result, casino groups are looking further afield for locales to attract the gamblers among Asia's new rich, including those from China.

The golden years for casinos in Macau started two years after Macau's transfer to China, with the expiry of a 40-year casino monopoly enjoyed by Sociedade de Turismo e Diversoes de Macau -- a gaming group controlled by the legendary tycoon Stanley Ho, the father of Lawrence and 15 other children.

Keen to show that China would not be a dead hand in Macau, Beijing allowed the region to invite new players. The first competing casino -- the Sands Macau, owned by gambling mogul Sheldon Adelson's Las Vegas Sands group, opened in 2004.

Macau was a zone of tolerance for the Chinese authorities, exempt from the periodic crackdowns on money laundering and capital flight that hit casinos across China's borders in Myanmar, Laos and North Korea. It seemed to be part of the Communist Party's deal with the new business class: Leave politics to us, and you can blow your money as you like.

Las Vegas-based Wynn and Hong Kong's Galaxy group, which initially brought together Adelson with a Hong Kong construction tycoon, got the first of the new concessions to operate alongside Stanley Ho, bringing in a multi-billion-dollar mix of glitzy accommodation and entertainment. Las Vegas Sands later split off from Galaxy under an ad hoc subconcession arrangement.

This pointed the way for the other concession holders to divide their rights. Wynn Resorts sold a $900 million subconcession in 2006 to a new joint venture between Packer's 53.1%-owned Crown Resorts, which runs casinos in Melbourne and Perth, and Lawrence Ho's Melco International Development. Another of Ho's children, Pansy, teamed up with MGM Mirage in a sub-concession from her father's SJM Holdings.

For Packer it seemed the best of all worlds. The saturnine, tango-dancing Stanley Ho has been one of Beijing's trusted capitalists. He and his late partner Henry Fok were both members of the Chinese People's Political Consultative Committee, an advisory body -- a sign of their standing in Beijing. Yet by teaming up with Lawrence Ho, Packer put a generation between himself and allegations of organized crime on the peripheries of Stanley Ho's casinos.

Who dares to bet?

Their Melco Crown Entertainment joint venture opened its first Macau casino hotel, Altira, in 2007, the year Macau surpassed Las Vegas in gaming revenue; a second complex, called City of Dreams, soon followed. Packer sold an Australian media empire built up by his late father Kerry to place his main bet on gaming. Unlike Kerry Packer, who was a famous "whale," or big better, in Las Vegas, James Packer is not a player, except as a casino owner. Lawrence Ho does not gamble, either.

Macau went on to have seven times the annual gaming revenue of Las Vegas. But at the end of 2012, the industry began to change. Xi Jinping, son of a revolutionary-era People's Liberation Army marshal and foremost among China's so-called "Red Second Generation," became Chinese Communist Party chief, and then president. Within a year, he started an anti-corruption campaign reminiscent of Mao Zedong's purges. Capital flight intensified, reaching $150 billion for the month of August this year, spurring tighter crackdowns on the most visible exit route, Macau.

"Macau's casinos became prime targets," said a senior Hong Kong journalist familiar with Macau, who asked to remain anonymous. "The government of Macau is completely under the control of the communists, like a mainland city. So mainland security organs ... have access to Macau bank accounts and videos from the VIP rooms of the casinos. Who would dare to bet there?"

The Chinese crackdown cut Macau's gaming revenue to 353 billion Macau patacas ($44.22 billion) in 2014, from a peak of 361 billion patacas in 2013. In the year to the end of September 2015, gambling spending was 36% below the comparable period ending a year earlier.

The result for Packer is that his Australian company's 34.3% share of Melco Crown's profit in the year to July 2015, adjusted for abnormalities, fell by 57.6% to 122 million Australian dollars ($xxx million). Macau casino company shares have fallen sharply over the past year, but have recovered from a low point at the end of October amid signs that revenues may be stabilizing on a monthly basis.

Beijing's grip is not relaxing. "The inherent negative elements of this gaming economy have affected social stability and security in Macau and even mainland China," said Li Fei, a senior party official, in a speech in December 2014. Xi has suggested that Macau's economy should diversify away from gambling, which was causing "deep-seated problems."

Officials have insisted that authorities will "strictly follow" a policy of allowing only 3% annual growth in gaming tables up to 2023 (when Xi's expected 10 years as party chief will have just ended).

However, international casino operators can expect some compensation from wealthy Chinese gamblers moving further afield. In its latest year, Crown Resorts reported 41.8% growth in so-called VIP revenue at its Australian casinos to A$956 million, out of total revenue of A$3.2 billion, with a profit before tax of A$916.5 million.

Crown plans new luxury hotel towers in Melbourne and Perth for these mostly Chinese high-rollers, who sometimes put up to half a million dollars on a single bet at baccarat when they feel lucky, and has upgraded its private jet fleet to shuttle them down.

Australia's state governments, keen to build up the tourism and entertainment attractions of their capitals, have been ready to help. Last year Victoria removed a "super tax" on VIP revenue and extended Crown's Melbourne license for 17 years, until 2050, in return for an up-front payment to state coffers of A$250 million and a further payment in 2033.

In New South Wales, former state premier Barry O'Farrell announced a new "unsolicited proposal" process that will allow Packer to insert a casino-hotel costing around A$1.5 billion into Sydney's Barangaroo harbor-side redevelopment.

Mixed results

Further afield the tycoon has had mixed results. He and Lawrence Ho failed in a bid for one of Singapore's two casino licenses in 2006. Melco Crown opened a $1.3 billion City of Dreams casino in Manila this February, in partnership with local tycoon Henry Sy, but a new government in Sri Lanka has vetoed Packer's proposed casino in Colombo. In Las Vegas, outside his joint venture with Ho, Packer is planning a $4 billion twin-tower casino resort, after a previous attempt at the U.S. market failed. Lawrence Ho recently opened a casino hotel in Vladivostok and is pursuing a project in Spain to supplement his own ventures in Cambodia.

The biggest prize of all would be Japan, which allows gambling only on a few public sports such as horse and motorboat racing. However, annual spending on vertical electronic pinball machines known as pachinko is estimated at up to 20 trillion Japanese yen ($165 billion). Cash prizes are illegal, although non-monetary prizes are sometimes exchanged for cash.

CLSA, a Hong Kong brokerage and investment firm, said in a 2014 report that the latent demand demonstrated by pachinko machines suggested that casino revenues could reach $40 billion a year in Japan if 12 casino-resorts were allowed to operate across the country. This would be close to the peak revenue levels achieved in Macau.

Melco Crown was quick to see the potential, announcing in September 2013 that it planned to invest more than $5 billion in Japanese casino resorts if the law was changed. "The potential is huge for integrated resorts in Japan," Lawrence Ho told Bloomberg in an interview at the time. "If Japan opens up and allows integrated resorts in Tokyo, Osaka, the market could easily be in excess of $10 billion to $15 billion or more."

In May this year members of the ruling Liberal Democratic Party introduced a bill in the Japanese Diet to authorize preparation for licensing of "integrated resorts" in time for the 2020 Olympic Games in Tokyo. Several foreign casino groups have met politicians and officials to discuss proposals, including Sands and MGM.

But there are serious political obstacles. The public is deeply wary of yakuza (mobsters) and loan sharks who lurk around pachinko addicts. A survey for the Department of Health, Labor and Welfare last year found that 4.8% of Japanese were "pathological gamblers" -- a much higher rate than in other countries where similar research has been done.

The LDP's coalition partner Komeito is deeply opposed to the bill, which has failed to make parliamentary progress, generating widespread skepticism about its chances of becoming law in time for casinos to open in 2020. Nevertheless, Prime Minister Shinzo Abe seems keen for Japan to liberalize its gambling law in the longer term, as are other conservatives. "Many LDP Diet members are backing the casino bill," said political commentator Hideaki Kase.

In an interview with the Nikkei and other Japanese media organizations in October, Lawrence Ho seemed resigned to a long wait."Melco Crown is only interested in markets that are big enough for us to build integrated resorts," he said. "Japan is certainly one of them, so we would be very interested and we have been very patient as well. We understand the Japanese government has to go through various debates. But we are willing and ready."

(Nikkei Asian Review)