Positive shoots and lessons learned

    Macau, St. Paul Ruins
    As Macau celebrated the 20th anniversary since the handover to China last December, there was no indication of how the gambling hub’s fortunes were about to change so radically.

    This year, there appears to be little cause for celebration, with the global pandemic having halved the size of the local economy and caused a plunge of about 80 percent in annual gross gambling revenue.

    Macau heads into 2021 with more uncertainty than it has faced in recent years. Recovery from the crisis has been slower than anyone forecast and remains vulnerable to new outbreaks of Covid-19 until a vaccine program is well underway.

    While late in the year, the prospect of Macau adopting China’s digital yuan has further shaken the market, casting significant doubt over the survival of the junket industry and with it the VIP gaming sector. 

    “The Macau government has been widely praised for its handling of the crisis.”

    Although the short-term future continues to be doubtful, analysts agree the longer-term outlook remains intact and the pandemic has highlighted positive elements and provided a context for change.

    The Macau government has been widely praised for its handling of the crisis. The first case in the territory was discovered on January 22 and on February 4 CEO Ho Iat Seng took the unprecedented decision to shut the 41 casinos for two weeks.

    Border controls were put into place and a system to ensure citizens were supplied with adequate face masks. A study from the Macao Polling Research Association, made in July, showed that 94.7 per cent of the respondents are satisfied with the overall performance of the Macau government in dealing with the prevention of the epidemic. 

    Macau has had a total of 46 cases of the disease and no deaths.

    “Frankly speaking, the Macau Government has performed admirably well throughout the pandemic with proactive and decisive leadership and generated community support focusing on public health and safety as well as economic and social stability,” Jay Chun, head of the Macau Gaming Equipment Manufacturers Association said.

    Government measures were put in place to help small and medium-sized businesses and struggling families. The operators were encouraged to keep the lights on and their staff employed. 

    Despite having little to no income and not much wiggle room when it comes to cutting costs, the six operators managed to improve efficiencies, with the first reporting that they had turned EBITDA positive in October. 

    Galaxy Entertainment said its daily operating expenditure has come down from $3.4 million prior to the crisis to $2.3 million in Q3, allowing breakeven at a much lower level of revenue. Most of the others reported a similar picture. 

    At the beginning of the year, there had been an expectation for a v-shaped recovery, led by the VIP sector. That hope has long faded and now projections are that it will take until at least 2022 for the market to regain its 2019 levels and longer still for the VIP market to recover.

    Premium mass and later mass is expected to lead growth and analysts say further out this improved sector mix will have a positive impact on operators’ margins.

    Significant question marks remain over the VIP sector, with the prospect of a digital yuan being introduced raising concern about the survival of the junket operators.

    The Gaming Inspection and Coordination Bureau has denied that it has been in talks with operators about the possible impact of the introduction of the currency.

    However, Beijing is fully embracing the concept and has been conducting ever larger trials of the digital currency through a series of pilot programs.

    The currency would give the central bank far greater visibility of how money circulates throughout the country.

    J.P. Morgan said it doesn’t think there is much cause for the concern in the short term, given the DICJ denial, but agreed that it could potentially be the end of the shrinking junket sector.

    “Since gamblers would be able to use e-renminbi from his/her e-wallet to purchase chips, casinos wouldn’t have much, if any, reason to pay hefty commissions to junkets – currently approximately 44 percent of VIP gross gaming revenue.”

    The pandemic has again thrown a spotlight on the dangers of relying on a single industry and a single tourism market for Macau’s economy and this time in a light that’s so dramatic it would be hard to ignore.

    The government is expected to push further to diversify Macau’s economy. It’s also expected to seek concrete pledges from operators about non-gaming diversification as part of the concession renewal process.

    Details of the retendering aren’t expected to be disclosed until late next year and the government has also said it doesn’t intend to delay the process, despite the short period of time for operators to prepare their submissions. The concessions expire in June 2022.