Special Report – Bracing for lower revenue, less investment

Overall taxes on gaming ended up increasing by one percentage point to 40 per cent under the new law, with the CE being able to reduce indirect levies. However, due to the changes in the business environment, Macau will need to learn to live with lower revenue from taxes paid by concessionaires

Macau Business | July 2022 | Special Report | Gaming in Macau: The new era


The final version of new gaming law amendment bill had a last-minute addition: While direct taxes on gross gaming revenue remained unchanged at 35 per cent, the percentage of indirect taxes edged up by one percentage point. In the previous law, a levy of 1.6 per cent was collected by authorities to concessionaires to fund the Macao Foundation’s cultural, social, economic, educational, scientific, academic and philanthropic activities, with another 2.4 per cent collected for urban and tourism development, and the local social security fund. Under the newly approved law, the mentioned levies will be respectively increased to two and three per cent.

The tradeoff is the possibility of gaming operators seeing these two extra levies reduced or exempted if they can prove they have attracted gamblers from other jurisdictions to the SAR.

According to article 22 of the new law, the Chief Executive may allow the reduction of exception of the levies (indirect taxes) to be paid by the concessionaires for or “reasons of public interest”, “namely” attracting “customers from foreign countries”, to be specified in future regulations.

Gaming law expert António Lobo Vilela told Macau Business that he was caught by surprise by this ‘last minute’ development announced days before the second reading vote by the Legislative Assembly.

“I was surprised especially because the decision was taken without any known scientific study”, said Mr Lobo Vilela, who served as an advisor to the Secretary for Economy and Finance between 2016 and 2020.

António Lobo Vilela, who was also legal advisor, both to the Commission of the first public tender to grant casino concessions and of the think-tank in charge of (co)drafting the 2001 gaming law, added that “the increase in the fiscal and para-fiscal burden of the gaming operators will make them weaker in a moment in time where they should get stronger.”


“The increase in the fiscal and para-fiscal burden of the gaming operators will make them weaker in a moment in time where they should get stronger” – António Lobo Vilela

Notwithstanding the tax burden, analysts converge on this idea that gaming in Macau will most likely be a less profitable business than it was before the pandemic – and before the ongoing legislative changes, accompanied by a strengthening of capital outflow control by China.

While there is always a chance the forecasts will fail, in this case the greater probability is that levels will decline even more severely than expected, rather than return to or surpass the 2019 norms.

“It’s likely to be difficult for gaming revenues to reach pre-pandemic levels,” Carlos Siu Lam, Centre for Gaming and Tourism Studies, Macau Polytechnic University told Macau Business.

“Yes, there will be less profit, since there will be fewer segments to market to, but lower investment levels were inevitable given there is no more land and hence no potential for new integrated resorts,” Alidad Tash, Managing Director 2NT8 Limited adds. “And yes, there will be fewer workers, since catering to high-rollers requires a disproportionately high worker-to-player ratio.”

Less gaming revenue will inevitably have implications on the Macau SAR’s budget.

That’s why Carlos Siu Lam believes that “with less gaming revenue, it’s natural for the Government to cut expenditure and seek other ways to earn more.”

The Programme Coordinator for the Bachelor of Business Management in Gaming and Recreation Management goes further: “With the Government more prudent in its expenditure, the idea that it would pay for everything, as it did in the pre-pandemic period, may change. Anyhow, Macau’s fiscal situation is still much better than that of many jurisdictions in the globe.”

One of the factors to take into account is the reduction of the duration of each concession to 10 years. The government justifies this as follows: “[since] the casino equipment and facilities will revert to the Macau SAR at the end of the current concession period, new concessionaires may not need the time to build casinos, so the period of concession after the revision of the law should not be too long.”

Another consequence will be the lack of interest on the part of new operators to compete in the public tender: who is available to invest with a concession of only 10 years?

With less income and less investment, fewer workers will be needed, which will have consequences for the local labour market.

Some experts, such as Zeng Zhonglu (Macau Polytechnic University) already anticipate collective redundancies, which – if they happen – will only take place after the end of the public tender.

The concessionaires’ financial expectations are far from rosy – on that point there seems to be a consensus.

There are even those, like analyst Edward Moya of the brokerage Oanda, who believe the legislative changes to casino operation in Macau “will crush the margins and all the growth” the North American operators had anticipated.

“It’s very negative for the shares of American casinos,” the expert said in the wake of a devastating decline in stocks on the stock market because of the Chinese government’s legislative review.

“With less gaming revenue, it’s natural for the Government to cut expenditure and seek other ways to earn more” – Carlos Siu Lam


Pending

A lack of expectation on the part of the Government that the (new) concessionaires will make significant investments in Macau does not mean there will be no facilities inaugurated in the coming months or even years. Consider Galaxy’s Phase 4, scheduled for 2024.

In the coming months, Melco is expected to open Phase 2 of its Studio City, just as Sands is likely to complete redevelopment of the Londoner (the Londoner Arena will be ready in the second half of this year). SJM also has a series of partial openings to do before the entire Grand Lisboa Palace is operational, like the launch of the Palazzo Versace Hotel.


Another headache?

Macau casino operators may be jointly and severally required to pay amounts totalling up to HK$50 billion for “unsatisfied liabilities” and “uncollected debts” related to the abrupt cessation of activity of both Suncity and Tak Chun, the biggest among “junket” groups until the arrests of their leaders, Alvin Chau and Levo Chan. The warning comes in an April report by Credit Suisse, which estimates the total liabilities of junkets at around HK$100 billion, including frozen deposits.

“Their operations shut down abruptly, leaving behind a lot of uncollected debt and unfulfilled liability. When a junket business is closed, naturally those who owe it money – junket account receivables – will not repay their debt, leaving behind a massive account payable due to the agents,” the investment bank says.

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