The combined value of casino equities in Macau lost a combined market capitalization of $14 billion as the share prices tumbled following an announcement of a new regulations on the sector. Officials in Macau announced they would be taking tougher measures against the casino businesses in the region, adding this would include new government officials appointed to oversee the world’s richest casino business.

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There are incoming fireworks in Macau’s casino sector as the local authorities make structural changes to the market, threatening the longevity of the industry. ©leonkinkeong1/Pixabay

The Bloomberg Intelligence index, a market analytics tool, tracked a 19% drop in the equity value of the six biggest casino operators in Macau on Wednesday. There was a slight rebound from this low point, but the day will have hurt the casinos’ longtail outlook significantly. International operators in Macau saw the worst sell-off, Sands China losing as much as 28% on its share price, with Wynn Macau sliding by some 34% and Galaxy Entertainment Group slumping by 18% – all three drops being the most severe in the history in the companies’ share price.

Officials in the economic zone, the only place where gambling is legal in China, said that the next 45 days would involve a great deal of public consultation and discussions to deliberate over the legal challenges and consequences that may arise from these changes. Amongst other things, the main topics of discussion will be the number of casino licenses the city should grant to new casinos, the validity period granted on a new operating license, and the levels of scrutiny required by the government on the internal operations of a casino. A very broad set of considerations that could carry some major implications for the future stability of Macau’s casino business.

There are many licenses that are still being negotiated for approval in Macau – but with regulatory periods requiring a shorter validity period than previously allowed, next June will be the time when the situation is tightened around what is and isn’t possible. This shake-up and shift in policy from the central authorities of China & Macau have taken many people by surprise.

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Macau Casino Industry Taken by Surprise

The industry had been able to expect a round of license renewals as the current agreements have an expiration date, but the move to tighten the restrictions against the casinos has come as a shock to owners. Besides tightening the regulatory framework around the industry, the local authorities have alluded to a plan where shareholdings in these companies will need to move under local ownership – however, there have been few details on exactly how this will be implemented. The pressure being applied by China’s communist party is part of a broader plan to clamp down on the freedom of private enterprises operating on its territories.

Investors are clearly spooked by the latest policy shifts in China, with many now questioning the investment security of the entire market. Ultimately, there is a major shift in the works, the status quo in the country seems to be a strong shift towards increasing the regulation, taxes, and freedom of movement in the market.

JPMorgan Chase in their updated review of equities in the Chinese region downgraded the six largest casinos to a sell or neutral weighting. In their latest research paper, they alluded to the seeds of doubt that had already been planted in the mind of investors, the major players in this region have been seriously damaged, with going concerned already being mentioned for the foreign-owned enterprises in Macau.

The tightening restrictions come at a time when the casinos are already dealing with the cash-flow problems from Macau COVID restrictions. The lockdown initiated by the Macau government put a curb on the freedom of movement around the region, with tourists completely cut off, the lifeblood of the economy was seriously damaged. Gaming revenues have plummeted since the outbreak of the pandemic, with a brief revival stint in-between, the gross drop has been in the region of 82%.

Among the terms being discussed are a large range of financial and legal restructuring measures – the particular focus is being given on how returns on the equity are delivered back to shareholders. The dividend policies of these companies will likely receive new regulation, as will the level of access & oversight state officials have and can deploy when influencing the decisions of these firms. In any case, a final bill will be tabled with the local legislature in the next few weeks.

Financial Analysts Predict Crash in Macau Casino Sector

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Analysts across the industry are looking at these latest revelations with an extremely bearish outlook going into the new quarter. It appears that there will likely be a major sell-off in the market over the next few weeks as investors gauge the extent of damage these latest policy changes are likely to inflict. It is still not certain how bad the fallout will be, but with extensive governance and financial controls expected to be issued on the industry, it does feel like a monumental shift in outlook.

The writing has been on the wall for industry, with China clamping down on VIP players and junket operators over the past few years. The tight laws on currency outflows and money laundering have been utilized to shut down this loophole over the past 12 months. This major culmination of changing market and regulatory conditions means that casino owners may need to diversify their portfolios and invest more in services and leisure offerings besides gambling.

Nonetheless, the popularity of gambling in China hasn’t gone anywhere, and this changing regulatory environment means there will be much greater utilization of offshore operators in the Philippines and Cambodia. These two regions had been enjoying a major boom in top-line gross gaming revenues over the past years, halted slightly by the pandemic, they are heavily touted to return to old winning ways.

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Whilst it seems unlikely that large casinos like Las Vegas Sands and Wynn will lose their operating licenses, there is nervousness in the market there. Everything is going in the wrong direction for these businesses, and Macau is far from the place it was five or even three years ago.

Investors lose faith

In the Chinese gambling hub of Macau, casino operators will have to go through a rebidding process next year to renew their gambling licenses. In anticipation of this, local government officials have kickstarted a regulatory overhaul process which could see sweeping changes to the region’s gambling laws.

Macau gaming stocks fell as much as a third on Wednesday

A 45-day public consultation began on Wednesday with the aim of gauging public opinion on regulatory reform. Sadly for Macau’s operators, the beginning of this process has prompted fear of tighter regulations from investors, with share values paying the price. Macau gaming stocks fell as much as a third on Wednesday, losing around $14bn in value altogether.

All of Macau’s casino operators had share prices plummet. Wynn Macau saw the steepest decline, falling 34%. Meanwhile, Sands China recorded a large decline of 28%, while MGM China, Galaxy Entertainment, SJM Holdings, and Melco Entertainment also saw substantial drops.

What will the consultation include?

As reported by Reuters, Macau’s secretary for economy and finance confirmed the details of the government’s suggested regulatory changes on Tuesday night. The public will consider nine areas in the consultation which will run until October 29. This includes the number and length of gaming concessions and new employee protection and social responsibility measures.

Notably, the government has also proposed increasing its supervision of the casino industry. This would include a doubling of the number of gaming inspectors in Macau, in addition to the restructuring of several departments. The special administrative region has stepped up its casino scrutiny in recent years, with authorities clamping down on illegal capital flows from mainland China.

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Rebidding to begin in 2022

All six of Macau’s casino operators currently operate through government-granted concessions. After SJM and MGM China paid $24.8m each for license extensions in 2019, all of those concessions now expire in June 2022. Before the government renews those licenses, officials intend to finish their gaming law revision by Q4 this year. The legislative assembly will then assess a finalized draft bill.

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the process will no longer include sub-concessions

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In April last year, Macau CEO Ho Lat Seng announced one major change to the next round of licensing for operators. He said the process will no longer include sub-concessions. MGM China, Las Vegas Sands, and Melco all currently operate through a license of this kind, granted after the initial period of concessions in 2002.