Macau: The big gamble

Any visitor to Macau's casino strip will struggle to avoid David Beckham's smouldering gaze. The former England football captain is the frontman of a new campaign for The Venetian, the city's biggest hotel and casino resort. Images of him, clad in a James Bond-style dinner jacket, hang from walls and lamp posts in every direction. "Never settle", reads the slogan.

In a two-minute promotional video for the resort, Mr Beckham arrives at his suite, goes shopping, eats noodles, watches a boxing match, rides a gondola and attends a masquerade ball. He ends by kicking a football at a statue in the hotel lobby, before raising a glass of whisky to a group of adoring bystanders. Just one thing is missing from his itinerary: gambling.

A-listers such as Mr Beckham are the latest recruits for Macau's casinos, which are struggling to adjust to a slowdown caused by China's anti-corruption campaign. High-rolling punters have fled Macau in droves, sending sector revenue and casino share prices tumbling in the world's gambling capital.

The industry response is to learn from Las Vegas, where gaming typically accounts for less than half casino operator revenue. In Macau, that figure currently ranges from 88 to 99 per cent. Whether time or money, casinos want their patrons to spend it like Beckham.

"When visitors come to Macau they are not only seeking to participate in gaming," says Lui Che-woo, the billionaire chairman of Galaxy Entertainment, owner of the city's largest casino by revenue. "This is a major sea-change in the ecosystem of Macau."

From boom to gloom

Weaning Macau off its gambling addiction will not be easy. Casinos have been the main driver of an economic boom that has made the Chinese territory one of the richest places on earth, according to the World Bank.

Macau returned to Beijing's control in 1999 after 442 years of Portuguese rule, and remains the only place in China where casinos are legal. It sits an hour's ferry ride from Hong Kong, and a short hop from the wealthy mainland megacities of Guangzhou and Shenzhen.

The city's transformation from sleepy backwater to card game mecca began in 2004, when Las Vegas Sands opened the first international gaming property on the fringes of Macau's historic old town, soon after Hong Kong tycoon Stanley Ho lost exclusive rights to run casinos. Since then, the sector has generated revenue in excess of $240bn in a territory with fewer than 600,000 residents.

The gaming boom stepped up a gear in 2007 following the opening of The Venetian on a patch of reclaimed land now known as the Cotai strip. It has since been joined by a number of other projects from Cotai's five other casino licensees. More are under construction.

Revenue from "games of fortune" rose from just over $5bn in 2004 to a peak of more than $45bn in 2013, seven times that of Las Vegas. Visitor numbers have also ballooned, last year hitting 31.5m - two-thirds from mainland China - almost double the number in 2005.

But the sector is under fire. Its pivotal role in enabling wealthy Chinese to take vast sums of money out of the country has made it a focal point in Beijing's sweeping anti-graft campaign that has ensnared thousands of corrupt officials and business people since 2013. Concerns about capital flight out of China have also played a part as inbound investment has slowed along with the economy.

President Xi Jinping intervened late last year, warning of"certain deep-seated problems" in Macau. He urged the local authorities to tighten oversight of the gaming industry.

Some measures have been practical: visa rules have been changed and card payments restricted. But rhetoric, like Mr Xi's, has also played a role.

"As China has intensified the anti-corruption campaign, some corrupt officials, including executives of state-owned enterprises, no longer dare come to Macau to gamble," Li Gang, China's representative in Macau, recently told the Beijing News. "If these officials gamble in Macau, they will be discovered."

The gaming sector's decade-long boom is unravelling fast. Last year the industry saw its first annual decline in revenue since records began, which the Wynn Macau luxury resort attributed in part to the "chilling effect" of the anti-graft campaign. Macau's economy, as a result, shrank by 0.4 per cent, having almost doubled in size since 2010.

The downturn is yet to run its course. First-quarter gaming revenue dropped 36.6 per cent, while analyst expectations and company rhetoric are getting gloomier by the day.

Other factors are contributing to the reversal. The economic slowdown and housing market correction in China have dented the fortunes of some would-be gamblers. Meanwhile junket operators - who bring wealthy people to Macau and bankroll their betting - have found it harder to access financing.

Despite the slump, Macau's government appears unfazed. It has long called on the gaming industry to diversify, to help make the territory a "world centre for leisure and tourism". It wants people from across Asia to come to Macau to shop, see the sights and use it as a base for exploring southern China.

"It's unrealistic to believe you can rely on one sector and be safe for the rest of your life," says Helena Fernandes, head of Macau's tourism office.

The calm is not just bluster. Though some jobs have been lost in VIP betting rooms, the local labour market remains extremely tight. Macau has had an unemployment rate of just 1.7 per cent since the start of 2014. Average incomes rose more than 8 per cent last year, while a lack of workers has been blamed for delays to some new resort projects.

Government revenue rose to 175.9bn patacas (US$22bn) in 2013, according to the Department of Financial Services, up 21 per cent from a year earlier. That cash has helped fund investment in big-ticket projects, including an upgraded ferry port serving the casino district, a monorail and improved border crossings with China. A multibillion dollar bridge linking Macau and Hong Kong is set to open in the next couple of years.

"Now the pie is very large. It's big enough for the government to take care of the development of Macau," says Ricardo Siu, professor of business economics at the University of Macau.

Sustainable model

Macau does not feel like a city in trouble. On a recent weekday lunchtime, the main gaming floors at a number of large casinos were bustling, as punters flitted between games of blackjack, baccarat and sic bo, a Chinese dice game. Similarly, the main mall in The Venetian - a gaudy homage to Venice with warbling gondoliers and canals - was packed. At the restaurant in "St Mark's Square", there was even a queue for a table under the painted concrete sky. Ordinary tourists are still flocking to Macau.

"Growth of 30-40 per cent a year - that's not coming back," says Prof Siu. "But the slowdown will be very good for Macau's sustainable growth."

If Mr Beckham is the face hardest to avoid, pop star Katy Perry runs him a close second. Her video message, beamed across Macau, invites patrons to join her at a live show at The Venetian's 14,000-seater arena.

The Venetian is not the only casino to enlist western stars. Leonardo DiCaprio and Robert De Niro feature in a short film directed by Martin Scorsese to promote Studio City, Melco Crown's Hollywood-themed resort, due to open later this year. All six major operators are investing billions of dollars in projects, which will roughly double the number of hotel rooms on the Cotai Strip, the hub of Macau's gaming industry.

The shift towards leisure and entertainment will be familiar to the likes of Wynn, Sands and MGM, all of whom did something similar in Las Vegas during the 1990s. Casino operations now account for around a third of total revenue in the Nevada city for Sands, and 40 per cent for the US operations of MGM Resorts International.

Chinese mass-market gamers - the kind operators hope to attract with bumper cars and aquariums - come with margins four times higher than VIPs. There is no need to provide a free room, a free meal or any other service that high-rollers might require, while no agent demands a cut of the winnings.

The potential customer base is also enormous. China, already the world's number one source of international tourists, is expected to continue growing rapidly. CLSA predicts that Chinese outbound tourism visits will hit 200m by 2020, double the figure from 2013.

However, Macau's transition is likely to be a difficult one. Most non-gaming businesses struggle to make a profit - MGM China gave away hotel, food and retail services worth $108m last year, compared with the $41m it earned.

Chasing new tourists

Hotel rates have been reduced across the city in an effort to bring in enough visitors to make up for the loss of VIP punters. Much of the recent increase in visitor numbers has come from day-trippers and tour groups, who spend mealtimes and nights across the border at cheaper hotels and restaurants. Many never make it on to the casino floor.

"I really want to gamble a bit in these luxurious casinos," says Liu Guangwen, a retiree from the northeast Chinese port of Qingdao, in the atrium of the Galaxy. "But the itinerary here is too busy. I didn't even get a chance to try my luck. Maybe next time," he adds, while being dragged towards a tour bus by his wife.

The cost of blockbuster shows, such as Ms Perry's, is rarely matched by ticket sales, while many retailers, especially at the luxury end, are suffering. Macau's retail sales dropped 7.7 per cent in the fourth quarter of 2014.

"Nowadays, it's very rare to see people spend hundreds of thousands on luxury products," says the manager of a high-end retail chain in Macau. "Why would ordinary tourists do that? They can only be extremely wealthy businessmen or corrupt officials."

For all the talk of theme park rides and art exhibitions, the city's casino operators still rely on gambling revenue, most of it from high-rollers. Mr Ho's SJM Holdings gets just over 1 per cent of its income from non-gaming, while Sands China, the most diversified player, gets 12 per cent. VIP gaming still accounts for around two-thirds of revenue at Galaxy. "Macau will never be like Las Vegas in terms of the importance of non-gaming revenues", says Aaron Fischer of CLSA. "The investment that these companies are making in non-gaming is a requirement. This is the cost of staying in business in Macau."

The high rollers are also looking further afield. Revenue growth at casinos in Australia, Cambodia and the Philippines has been soaring as Macau's has been sinking, as Chinese punters look to gamble beyond Beijing's watchful eye.

Imperial Pacific, a Hong Kong-listed frozen food producer turned junket shareholder, on Monday announced a power supply deal with Chinese solar-panel maker Hanergy for its casino on the Pacific island of Saipan. Plans for the $7bn project include 4,000 rooms, more than any current hotel in Macau.

"This project has a bright future," says Eddie Lam, executive director of Hanergy. "So long as there are Chinese people, there will be gambling."

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