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Best of Benjamin Spillman

Gaming Guru

Benjamin Spillman
 

Gambling beyond Nevada: No more licenses in Macau

23 April 2008

MACAU -- Chinese officials said they won't approve new casino licenses in the booming gambling enclave of Macau, a move akin to slapping table limits on resort operators who want to raise their bets on a region producing twice as much revenue as Strip casinos.

News reports Tuesday from Hong Kong quoted Macau leader Edmund Ho telling Chinese lawmakers it's time to "review and estimate the development" of the area's surging gambling industry.

"We decided not to issue any new casino concessions, including casino subconcessions," Ho was quoted saying.

The limits, which won't stop projects already in the pipeline, are coupled with other efforts that could slow increases in the bounties casinos pay junket operators to bring in customers, a practice that saps casino profits.

With gamblers having already lost about $3.8 billion to Macau casinos in the first quarter compared with about $1.2 billion on the Strip in the first two months of the year, investors think the restriction will help existing resorts by preventing new competition.

"I think that is what is getting people more excited today," Deutsche Bank analyst Bill Lerner said about potential junket limits. "The junket commissions are moving to levels where it becomes almost unprofitable to operate in that part of the business."

Shares of Wynn Resorts Ltd., Las Vegas Sands Corp. and MGM Mirage -- the Las Vegas companies with a presence in Macau -- shot up on the news.

Las Vegas Sands shares rose $5.96, or 9.16 percent, to close at $70.99 on the New York Stock Exchange. MGM Mirage shares rose $1.67, or 3.4 percent, to close at $50.73, also on the NYSE. Wynn Resorts shares rose $7.10, or 7.43 percent, to close at $102.64 on the Nasdaq National Market.

However, Nicholas Yulico, a stock columnist for TheStreet.com, said the decision is bad news for Harrah's Entertainment. Company officials had their sights set on a new casino license to complement the golf course Harrah's already owns in the enclave. Yulico wrote that Harrah's would need to buy an existing company if it wanted to operate a casino in Macau, an unlikely prospect for a company that's deeply in debt from a $17 billion buyout that took the company private late last year.

The giddiness over gambling stocks, which have languished in recent months, suggests investors think growth prospects in Macau outweigh the risk of a slowdown.

"Macau as a brand definitely resonates with Asian consumers," said Jonathan Galaviz, a partner in Globalysis, a Las Vegas-based strategy consulting firm.

Galaviz, who makes frequent business trips to Macau, said the Asian economic boom means the number of people with disposable income is growing. And big population numbers in Asian countries mean about 2 billion people live within a six-hour flight to Macau. That translates to lots of action in the casinos.

"It really comes down to just pure numbers," Galaviz said. "Asia is a very condensed, densely populated region of the world."

In just a few short years Macau has risen from a gambling backwater with a seedy reputation to a destination for 25 million or more people annually.

Since the government opened the island near Hong Kong to foreign investment in 2002, Sands Corp., Wynn and MGM have spent nearly $5 billion building resorts there.

Lerner said there are already about 4,400 gambling tables in Macau and by 2011, he expects that number to increase to about 10,000 despite the restrictions announced Tuesday.

In 2007, Macau casinos raked in $10.3 billion compared with the Strip, where casinos won $6.8 billion.

Lately a number of factors helped to boost gambling revenue in Macau, in addition to its proximity to billions of customers and an infusion of new resorts.

Junket operators are issuing more credit to gamblers, who are taking full advantage. Also, the Chinese currency is gaining strength compared with currency in Hong Kong and Macau.

Lerner said that means gamblers can borrow from Chinese junket operators and spend in Hong Kong money, which is tied to the struggling dollar.

"It feels like they are getting a better deal," he said.

Actions announced Tuesday by Ho suggest that the government wants to head off irrational exuberance it fears could lead to future problems. Lerner said the Chinese government in the past has acted to cool overheated stock and real estate markets in other parts of the country.

"They seek stability," he said. "What you don't want is people going out of business because they grow too quickly and then have collection issues."

The Associated Press contributed to this report.