Scientific Game

Sheep in Wolf’s Clothing

A long-expected ban on slot parlours in Macau residential zones could be less problematic for the industry than feared

Wednesday, 01 June 2011 12:03
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The Macau government is likely to introduce a regulation that slot machine parlours will only be permitted to operate within a 500-meter radius of an existing casino or within the same distance of a five-star hotel, Inside Asian Gaming has been told.

Macau’s slot parlours—unlike slot zones in general casinos—are specifically marketed to and aimed at local players. So the proximity test looks like a way of trying to tackle the issue of such venues deliberately being placed in residential neighbourhoods. It will apply retrospectively to current slot parlours as well as to any new ones.

In practice, the policy may not be as draconian as it sounds. Macau only occupies 29.5 square kilometres, so very few slot parlours are more than half a kilometer from either a casino or a five-star hotel. The Macau government has also previously allowed development of casinos in suburban areas. Unless those are to be closed as well, they effectively act as an insurance policy for a number of slot parlours already in residential areas.

The most recent and most famous example of a suburban casino is Crown Macau (now Altira), opened at Taipa in May 2007. Given that it cost US$580 million and is owned and operated by Melco Crown Entertainment, a key investor in the Macau gaming market, the chances of it being closed or demolished are somewhere between nil and zero.

As a result of those legacy planning policies for casinos, and the fact that many Mocha Clubs and SJM Slots parlours are either inside or adjacent to upmarket hotels, it seems most of Macau’s slot parlours will not be caught by the new ‘proximity’ regulation.

Impact

Union Gaming Research said in a note in late May: “Of MPEL’s eight Mocha clubs, six of them are located within hotels. As recently as 2009, a government official with the DICJ indicated that only one of the Mocha clubs (Mocha Marina Plaza) is located within a residential area. As such, we believe this is the only Mocha club at risk of potential closure. We also note that Mocha Marina Plaza is the largest Mocha outlet, at 10,800 square feet, or 20% of total Mocha square footage of 52,500. Assuming Mocha Marina Plaza generates the same proportion of Mocha EBITDA relative to its size (20%), it would be therefore responsible for US$6.2mm in EBITDA, or just 1% of consensus expectations for company [MPEL] EBITDA of US$608mm in 2012.

Union added: “In a worst case (and in our opinion extremely unlikely) scenario whereby MPEL would have to exit the slot parlour business, we estimate a 5% impact relative to consensus 2012 EBITDA expectations. We estimate that Mocha clubs will generate about US$31mm in EBITDA in 2012, relative to consensus expectations of US$608mm.”

All this raises the question of why the ‘proximity’ test for Macau slot parlours is being considered at all. The answer may lie in domestic Macau politics. The Macau government is anxious that problem gambling is a growing issue in the territory among locals. A recent study by Dr Davis Fong, Director of the Institute for the Study of Commercial Gaming at the University of Macau, suggested school age children in Macau have been observed gambling with their peers on playground games for money, during break times.

“Young people often believe money can buy happiness and that gambling is a fast way to become rich. Their experience with games is at a much lower technical level, so they think it’s easy to beat casinos,” explains Dr Fong.

Macau’s Civil Servants’ Framework and the Gaming Industry Regulatory Framework ban public servants, including police officers, from entering gaming areas, “except when authorised or while in the performance of their duties”.

Currently casino and slot parlour employees are only excluded from gambling at the property or group of properties controlled by their employer.

“I’ve heard that the Macau government will announce a casino staff licensing framework this year,” says Dr Fong.

“It could be a good opportunity to acknowledge casino work as a high-risk occupation when it comes to problem gambling. Many casino employees are young and, according to a study conducted in Las Vegas, young staff are more likely to become problem gamblers. So it’s advisable to create this rule.”

Another plank of the government’s policy is a likely move to raise the casino entry age in Macau from 18 to 21. This latter initiative is also designed to encourage local people to pursue tertiary education. That’s because raising the entry barrier to 21 will mean they can no longer get a job as a casino dealer after graduating from senior high school.

The two SJM Slots parlours most likely to be affected by the ‘proximity’ test—located at the Canidrome (greyhound racing track) on the Macau peninsula and at the Macau Jockey Club racetrack on Taipa—have predominantly low-income customers that can least afford to spend money on gambling, on race days or otherwise. They are also, however, reported to have some of the loosest machines in Macau and thus offer the best value to players. There’s some irony in the fact that the fairest slots in Macau (for players) could be the victims of a policy apparently designed to protect consumers. If the Canidrome and MJC slots do close, then many locals disposed to gamble may still be willing to travel a few minutes up the road—and it is always only a few minutes in tiny Macau—to the majority of parlours not affected by the likely ruling. Those slot venues—while making a modest contribution to SJM’s gross—are probably some of the most profitable for the operator. They have old equipment and therefore—barring any unforeseen costs due to outright electro-mechanical failure of machines—some of the lowest capital depreciation costs, and no construction cost debt to service on the buildings.

But the Canidrome slots and MJC slots do suffer from a much more powerful handicap. They are friendless in political terms. Dr Stanley Ho, who helped to develop these facilities in the first place, has now retired from SJM and its parent STDM, so there’s no loss of face to him if the slot parlours there are closed down. The Canidrome and MJC already have sporting events for punters to bet on, so from the perspective of local politicians, having slot machines there as well is a form of double jeopardy for the local patrons. The fact that many state governments in the United States see race tracks as one of the few acceptable public locations for slots—on the basis that the people who go there have already identified themselves as gamblers so might as well be given some consumer choice and fresh opportunities to put taxes in state coffers—appears to cut no ice in Macau.

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