Gaming: SVA Warns New Law Could Deter Investment

The reduced timeframe of gaming concessionaires that was set at 10 years in the amended gaming law could deter investment – particularly in the second half of the term – according to political and corporate risk consultancy firm Steve Vickers Associates Ltd (SVA).

However, this should be manageable for investors if the incumbents win new concessions. A report on its assessment on Macau and the new gaming law was published following the announcement of the proposed gaming law amendment on Friday, which has caused casino stocks to attract billions of patacas in investment.

The city’s six operators are scheduled to see their coveted gaming privileges expire on June 26 this year.

With the expiration date just a few months away and no clear directives, a new tender by June seems unlikely.

According to Steve Vickers, CEO of SVA, a more realistic timeframe might be later on 2022, or potentially 2023.

This delay implies that the government will have to extend the concessions.

Vickers had previously stated that the “tendering process remains opaque, leaving the casino sector in a state of limbo,” adding that the city is potentially more acutely impacted by political risk than other PRC cities.

In the new report, Vickers expressed that major sources of risk to gaming operators are “not regulatory but nakedly political.”

“The primary factor which the Chinese and Macau authorities consider when evaluating concession renewals and new regulations is clearly the national security criteria and whether, for example, capital flight can be contained, especially when linked to US operators seeking to repatriate dividends,” Vickers stated.

The firm believed that the new law has an emphasis on national security, therefore posing heightened political risk to foreign investors.

Investors in the sector that generates 80% of Macau’s gross domestic product have been anxious for some time, as it was formerly announced that the law may include rules mandating the appointment of government representatives and specific restrictions on dividend payments.

The announcement on January 14, which did not include the rumored changes and was not as strict as previously feared, was a big win for the big six.

However, Vickers advised investors to take all risks into consideration “before being swept up too far in the current market euphoria.”

“Understanding and being able to gauge political risk has never been more important in this respect,” the expert added.

Not all may survive

As the draft law provides little detail on how the tender will operate and which businesses will be encouraged to tender, Vickers warned investors to be mindful that geopolitical tensions are high and liable to rise.

The current operators will obviously be among the tender applicants.

“Macau’s government may favor domestic champions, or at least demand changes in ownership structure to foreign controlled entities, which may be problematic,” the report stated.

“Therefore, not all current concessions may survive the process.”

Curtailed short-term growth

It was announced yesterday that junkets will be able to continue to operate in the local gaming industry as long as they are attached to a single concessionaire.

The possibility of exploring special areas of the casinos (VIP rooms) exclusively and under a special contract is barred to junkets, under a provision that aims to ensure that VIP rooms are the responsibility of the concessionaires.

In the report, Vickers believed that restricting any sharing of revenues with junkets will deter short-term growth, as reliance on junkets had hitherto underpinned VIP gaming and illegal capital outflows in the mainland.