Yesterday was an abject lesson in how markets can panic. How fear can really win out over greed. We’re told markets tend to overreact to bad news, but honestly, yesterday was a bit ridiculous.
At the close of trading on Tuesday night, the Hong Kong listed entities of Macau’s six concessionaires boasted a market capitalization of some HK$549 billion (US$70.6 billion). At the same time last night that number was HK$406 billion (US$52.2 billion), a wipe out of 26% in value – HK$143 billion (US$18.4 billion).
For over a decade Macau has been recognized as the world’s largest physical location gambling market. This is due to a confluence of factors such as the Chinese propensity to gamble, Macau’s proximity to mainland China with its 1.4 billion people and particularly its richest province of Guangdong with a population of 125 million, the general rise in wealth of China and its rapidly expanding middle class, and an enormous multi-billion investment by the six concessionaire companies which has created (and continues to create) the most magnificent and desirable integrated resort destinations in the world.
Has that confluence of factors dropped by 26% overnight? The answer, in short, is no. Absolutely not.
So, what happened? Why the financial freak out amongst the world’s investors? The answer is that late on Tuesday afternoon, after the markets had closed, the government held a one-hour press conference and released a document. Simple as that.
Surely then the document and the press conference must have contained radical information no-one expected, right? And that information must have been devastating to the industry, enough to wipe out US$18 billion in value, slicing off more than a quarter of the value built up over the past 20 years in a single, cataclysmic day! The document must have contained incredible revelations, completely changing the fundamentals of the industry, surely?
Er, not really. No. In fact, pretty much everything that was stated was in line with expectations. It was in line with what the media, the government and the industry has been telegraphing to anyone who would listen over the past five years or so.
If you are someone who lives in Macau and who follows this stuff day to day, nothing in the document or stated at the press conference really surprised you. It was standard Macau and China stuff. Big on themes and goals, light on details.
But what the document and the press conference did do was to clearly enunciate these themes and goals, to write them all down in a single place, and the vacuum of detail was quickly filled by so-called “experts”, most of whom were on the other side of the planet, or at least as far away as Hong Kong. Throw in a bit of market uncertainty and a pinch of China fear and loathing, and bingo, the narrative becomes “Macau is doomed”, investors get spooked and the market crashes!
What’s new – and is it really new?
Let’s stop for a moment and objectively, calmy and rationally look at exactly what we learned on Tuesday night.
All that’s been definitively announced at this stage is a 45-day public consultation period from 15 September to 29 October 2021, with five in-person consultation sessions, one for operators and junkets and the other four for the public. This public consultation period has been long expected and discussed.
There is a proposal for more share capital in each concessionaire to be held locally – but there is no information on the size of the increase above the current 10% or how it would be allocated. Actually, I see this as a positive for operators. Some commentators had been speculating that one or more US operators may lose their licenses completely, although this is admittedly more towards the tin foil hat end of the spectrum of opinion. Surely just an increase in local ownership is a preferable option? And exactly what does “local” mean? And which local companies can afford to acquire sizable chunks of these multi-billion-dollar companies? And wouldn’t increasing local ownership motivate the Macau government to support the concessionaires more, as it will be their own citizens pressuring them to do so? This is not a bad thing!
The next proposal is for the distribution of profits to shareholders to require pre-approval from the government, similar to public utilities. Guess what, the six concessionaires in Macau, in my view, already are public utilities! They do exactly whatever the government asks of them. During COVID, they’ve been paying staff they don’t need because the government insisted. When there’s a natural disaster in mainland China, the China Liaison Office arranges for each concessionaire to make a hefty donation to support – and they all do, without question. And so on and so on.
The government perceives the cash flow generated by the concessionaires as something that comes from the people of China, and they want to ensure the concessionaires give back to society before they distribute to their owners. Frankly, those CSR-type initiatives have been happening for years and will continue to happen. So really, there is nothing much new here.
Next, the government is proposing a kind of government representative for each concessionaire to provide closer supervision of operations, but whether this person would sit on the board, walk the gaming floor or simply act as a dedicated liaison (or none of the above) is unknown. And would this change how the concessionaires act? I think not. We already have oversight, it’s called the DICJ – the Macau gaming regulator. The DICJ has been beefing up its staff numbers in recent months, signalling yet more regulatory activity, so this additional oversight is not a surprise. But here’s the point – adding yet another element of oversight doesn’t change much when you are already under the microscope.
Next, there could be new criminal offences for accepting certain deposits, which might hinder the VIP industry. Unless you have been living under a rock for the past year or two, you would be aware the VIP industry has been becoming a smaller and smaller part of Macau and will continue to do so. There has been a crackdown in China on capital flows and the junkets have been hastily reinventing themselves as operators as well as looking to other markets in Asia. It’s been going on for years. When I first arrived in Macau in the 2000s, VIP accounted for some 80% of GGR, now it’s down to around 35%, and likely to fall further. This has been an industry trend for a long time, and the concessionaires long ago factored this change into their calculations.
What is NOT new?
What didn’t change yesterday? A lot. We still don’t know if the concessions will be extended in June 2022, and if so for how long, or how many concessions will be awarded in the re-tender (although the overwhelming prevailing wisdom is the status quo of six), or whether the 20-year concession period will change.
We learnt the government wants the concessionaires to focus on their CSR obligations, diversify more into non-gaming, and protect Macau employees. Captain Obvious is in the house! All of that has been happening for years. Nothing to see here.
Frankly, all six concessionaires have long-known exactly how the government wants them to behave, and they are all unequivocally compliant. All the market really learned was what all of us have known in Macau for a long time.
So far, it is all much ado about nothing and there will be no clarity for at least six to nine months – and possibly considerably longer if the concessions are extended, as they are widely tipped to be.
If the devil is in the detail, these proposals, at least so far, are remarkably free from sin.
Amendments to Macau’s gaming law are far from being finalized and their impact will only become clear once full details are made public. Until then, it’s all just guesswork.
While the markets may abhor uncertainty, this is something all of us in Macau have learnt to live with for a long time, and Tuesday night’s news absolutely did not justify the kind of decimation of market capitalization we saw yesterday.