Analysis: Macau Casinos Face Challenges with Major Non-Gaming Investment Pledges By Reuters

By Farah Master

HONG KONG (Reuters) – As casinos in Macau prepare to begin new licenses on January 1st, the pressure is on to meet a government directive aimed at diversifying operations beyond gambling, which has long been their primary source of revenue.

For the past two decades, major casino operators including Sands China, Wynn Macau, MGM China, Galaxy Entertainment, and SJM Holdings have generated billions of dollars from their establishments in this Chinese special administrative region, transforming a once quiet fishing village into a bustling metropolis.

However, these operators are now faced with a new set of challenges as they enter into shortened 10-year contracts at a time when the COVID-19 pandemic has significantly impacted Macau’s gambling revenue, making 2022 the worst year on record. As a result, industry net debt is increasing, and operators are now subject to heightened government scrutiny and control over their activities.

The recent relaxation of COVID-19 restrictions in mainland China and Macau has led to a surge of infections in Macau, affecting the workforce as well.

UPPING THE ANTE

Casinos have pledged to invest a total of $15 billion over the next decade, with 90% of that investment earmarked for non-gaming ventures. However, many operators face difficulties monetizing these new initiatives, given their lackluster performance in non-gaming sectors since 2001 when the gaming industry was first liberalized.

According to Ben Lee, founder of Macau gaming consultancy IGamiX, non-gaming revenues, which historically accounted for around 5% of total gaming revenues prior to the pandemic, need to exceed 30% over the next decade. Lee noted, "For the past 20 years, none of the operators have managed to establish any significant progress in non-gaming."

He indicated that unlike the successful Las Vegas model, the profit margins from non-gaming venture in Asia are different due to distinct consumer spending behaviors. Yet, he believes that operators like Galaxy, Melco, and Sands may have a better chance at diversifying due to their established track records and management.

Traditionally, Macau has attracted male gamblers aged 30 and older, but there has been a noticeable increase in visits from young families and women in recent years. As the only region in China where casino gambling is permitted, Macau’s profile is poised for change.

Following the recent award of their contracts, casinos have unveiled plans for non-gaming attractions, including indoor water parks, wellness centers, art exhibitions, and large botanical gardens inspired by attractions in Singapore.

KEY CHALLENGES

The current non-gaming offerings in Macau have predominantly focused on retail and dining, alongside some entertainment options like nightclubs, cinemas, and themed properties. Still, these fall short compared to Las Vegas, which features a vibrant entertainment scene that attracts a global audience. Over 90% of Macau’s visitors are from mainland China, prompting the government to mandate that operators also draw in foreign tourists as part of the new regulations.

Moreover, new rules dictate that operators regularly report to the government on the progress of their investments, detailing both the value and timeline for execution. This increased regulatory oversight comes at a time when Macau casinos are grappling with soaring debt levels, which have reportedly quadrupled to $23 billion in 2022 and are expected to peak at around $24 billion by the end of 2023.

Further complicating matters, Macau struggles with limited international connectivity, outdated infrastructure, and a shortage of skilled labor, alongside reputational issues related to its handling of the COVID-19 pandemic. There are few direct flights from potential overseas markets, and local transport options are inadequate for moving large groups.

Alidad Tash, a former senior executive in Macau’s casino industry now running his own consultancy, highlighted that a major hurdle for operators is that mainland Chinese already have access to various forms of entertainment, dining, and shopping in their cities. "What they come to Macau primarily for is the one thing that is not legally allowed within China: gambling," he asserted.