MACAU GAMING BOOM THREATENED BY RESTRICTED VISAS,

C O N F I D E N T I A L SECTION 01 OF 04 HONG KONG 001962

SIPDIS

STATE FOR EAP/CM

E.O. 12958: DECL: 10/20/2018
TAGS: ECON EFIN EINV ETRD MO CH
SUBJECT: MACAU GAMING BOOM THREATENED BY RESTRICTED VISAS,
SHADY JUNKET OPERATORS, UNDERDEVELOPED INFRASTRUCTURE

REF: HONG KONG 793

Classified By: Consul General Joseph Donovan for reasons 1.4 (b) and (d
).


1. (C) Summary: U.S. casino executives, Macau government
officials and gaming industry experts tell us new constraints
are harming continued growth in Macau's gaming industry.
While gaming has driven Macau's double-digit economic growth
in recent years, gaming company executives said the PRC's
recently imposed visa restrictions had begun to materially
affect revenues: monthly casino revenue fell in September
2008 (compared with the prior year period) for the first time
since January 2006. Casino operators regret the growing
power of "junket" operators in mainland China that account
for most of the Macau casinos' earnings and who, themselves,
may have earned USD 2 billion. They believe the operators
are directly or indirectly involved with organized crime in
Macau and the mainland. Macau's gaming executives criticized
Macau's government as unsophisticated, opaque in its
decision-making, and hamstrung by a recent corruption
scandal. They also cited government interference in the
local labor market and insufficient spending on
infrastructure projects as impediments to Macau's growth
potential. End summary.


2. (C) Comment: The Macau "boom" - predicated on billions of
dollars in foreign investment and four years of double-digit
growth in visitor arrivals - may be sharply slowing. In
addition to a global economic slowdown, the fact that
mainland gamblers account for the majority of funds flowing
into Macau appears increasingly undesirable to Beijing. The
perception is widespread that, with the implicit assistance
of the big "junket" operators, some of these mainlanders are
betting with embezzled state money or proceeds from official
corruption, and substantial portions of these funds are
flowing on to organized crimes groups in mainland China, if
not Macau itself. In this context, Beijing's decision to
restrict PRC visitors to Macau has the added benefit (to
Beijing) of forcing casino operators to look further afield
for customers. In addition, Chief Executive Ho has been
hamstrung by a major corruption scandal within his cabinet,
and is increasingly seen as a lame duck as he approaches the
end of his term in late 2009. Significant decisions will
likely remain on hold until his successor takes office.
Gaming operators also face a dilemma: whether to continue to
massively expand investment as planned, in spite of slowing
revenue growth, or to scale back. End comment.

Visa Restrictions Placed on Mainlanders Visiting Macau
-------------- --------------


3. (C) The PRC government has tightened restrictions on the
flow of mainlanders into Macau. Effective September 1,
mainland Chinese citizens are precluded from using Hong Kong
as a transit point for visits to Macau, unless they obtain an
additional HK-Macau travel permit. In addition, the
frequency of direct visits to Macau (i.e., not through Hong
Kong) by mainlanders has been substantially reduced through
slower processing of visas and tightened permit restrictions
by mainland officials. In the four years through 2007, the
average annual growth rate of visitor arrivals in Macau
exceeded 20 percent. While visitor arrivals grew another 17
percent to 20.2 million individuals during the first eight
months of 2008, compared with the same period in 2007, casino
executives told us the new visa restrictions imposed by
Beijing have reduced both visitors and gaming revenues in
September 2008. A senior U.S. executive at Wynn Macau told
EconOff recently that Wynn's revenues in September were down
approximately 15 percent from the prior year (proprietary
information; please protect).


4. (U) Nine-tenths of Macau's visitors come from mainland
China, Hong Kong or Taiwan. According to the Director of
Macau's Tourist Office, mainland visitors accounted for 58
percent of all visitors to Macau during the first eight
months of 2008. (Note: During the same time period, visitors
to Macau originated from other locations as follows: Hong
Kong 27 percent, Taiwan 4 percent, with no other source
accounting for more than 1.5 percent. End note.) Casino
operators are very nervous about the decline in revenues from
mainland visitors, as almost all of Macau's gaming companies
are implementing expansion plans; the global credit crunch
adds to these fears. Investors took notice and hammered the
shares of the three U.S. publicly traded gaming companies in
Macau. In the 30 days ending October 21, 2008, while the S&P
500 Index fell 21 percent, the share price of Las Vegas Sands

HONG KONG 00001962 002 OF 004


(LVS) declined 72 percent. Wynn Resorts and MGM Mirage fell
45 percent and 60 percent, respectively.

117 Percent Growth in Hotel Rooms During Next Two Years
-------------- --------------


5. (U) Macau currently has 17,651 hotel rooms and 29 casinos
in operation. Against the backdrop of tighter visa
restrictions on mainlanders visiting Macau, massive
construction projects already underway are scheduled to
create eleven new casinos and add 22,000 hotel rooms in Macau
during the next two years. Most of those new rooms will be
located in sixteen new five-star hotels in and around the
"Cotai Strip," a LVS-sponsored development adjacent to LVS'
Venetian Resort and Casino, the largest hotel/casino in the
world. All of the hotels will be directly linked with new,
already licensed casino operations. LVS needs externally
sourced funds totaling at least USD 2 billion, in order to
complete construction of its portion of the Cotai Strip.
However, media reports from October 20 stated LVS has been
forced to put a multi-billion dollar syndicated credit
facility on hold, due to the global credit crunch and the
Macau gaming market's looming supply/demand imbalance. While
LVS' largest shareholder, multi-billionaire Sheldon Adelson,
could possibly provide the funds needed to complete his
company's construction plans, market analysts speculate he
would take such action only if Beijing significantly loosened
visa restrictions.


6. (C) With near zero unemployment in Macau (due to
increasing market demand and MSARG hiring restrictions on
both domestic and foreign workers),casino operators are
maintaining padded payrolls - in some cases including
thousands of extra workers - to accommodate their future
needs. A senior executive for the Stanley Ho Group of gaming
companies told EconOff on September 25 that his company
currently has "3,000 too many" employees. He said the Ho
Group will reduce this excess through attrition and opening
two new gaming venues in 2009.

Inadequate Infrastructure, MSARG Corruption and Incompetence
-------------- --------------


7. (C) Observers offer various theories to explain the PRC's
implementation of new visa restrictions at a time of
explosive construction growth in Macau. University of Macau
Professor of Economics Ricardo Siu (protect) told EconOff
that Beijing wants to slow Macau's growth rate, in order to
allow the MSARG to build adequate support infrastructure.
(Note: Siu is a paid advisor to the MSARG. End note.) He
said, "(The MSARG) must slow things down now. It's time to
consolidate, in order to ensure sustainable growth." He
noted that the (less volatile) non-gaming expenditures by
visitors to Macau account for only 10-15 percent of the
total, while the portion of non-gaming expenditures by
visitors to Las Vegas exceeds 40 percent. In addition to the
visa restrictions, he said Beijing has pushed the MSARG to
strengthen internal control procedures at the casinos and
amend Macau's Gaming Law and regulations. He said the MSARG
will soon propose amendments to the Gaming Law and ask the
casino operators "behind the scenes" for comments on its
proposals.


8. (C) Siu said other factors also prompted Beijing's visa
restrictions. He cited the January 2008 sentencing of
Macau's former Secretary for Transport and Public Works, Ao
Man-long, to 27 years in prison for corruption, money
laundering, abuse of power and other crimes. Siu said the
case was a "wake-up call" for Beijing that prompted increased
oversight. He said PRC leaders believe corruption within the
MSARG "likely extended well beyond Ao." A lawyer within the
Macau government (protect) agreed, telling us that Beijing
implemented the visa restrictions as a warning to Chief
Executive (CE) Edmund Ho that he had better get his
government on track.


9. (C) While none of the casino operators would comment
directly about corruption within the MSARG, the president of
a major U.S. gaming operation in Macau told EconOff that the
MSARG "is not very sophisticated." He said, "There is a
significant lack of intellectual firepower within the Macau
government." Several casino executives told us CE Ho has
lost the respect of Beijing and is a "lame duck," following
the Ao scandal. As a possible sign of a MSARG leadership
vacuum, casino operators pointed to the MSARG's failure in
the past several months to make licensing decisions for
several pending hotels and bars.

HONG KONG 00001962 003 OF 004



Organized Crime Benefiting from the Boom?
--------------


10. (C) Casino gaming accounts for a majority of Macau's
approximately USD 18 billion GDP. Despite efforts to grow
mass-market gaming in Macau, wealthy gamblers brought into
Macau by junket operators accounted for approximately 60-70
percent of Macau's aggregate gaming earnings (or "win") of
USD 10.2 billion in 2007. This means that over one third of
Macau's economy is effectively controlled by junket
operators. The MSARG licenses junket operators, and fewer
than a dozen of these dominate the market. They assume each
mainlander's credit risk and accompany the individual to
casinos in Macau, where they typically provide the gambler
with his stake. Almost all junket gamblers play only
baccarat, and the casinos' historical statistical win from
that game totals 2.85 percent of the "roll" (i.e. the amount
bet). The casinos in Macau pay junket operators a commission
equal to approximately 1.0 percent of the roll. Therefore,
estimating roughly, Macau casinos paid junket operators at
least USD 2.1 billion in 2007, calculated as 35 percent (i.e.
1.0/2.85) of the casinos' at least USD 6 billion of win from
junket players. The junket operators' wealth and influence
dramatically increased in recent years, as Macau's gaming
industry boomed.


11. (C) The executive in Stanley Ho's group asserted that
"all of the junket operators are directly or indirectly
involved with the triads." He criticized the MSARG's recent
decision to lift the ceiling on the junket commission rate
(from 1 percent to 1.25 percent),which funnels more money to
these groups (and, of course, hurts the casinos' bottom
lines). Each of our American casino interlocutors stated
they only deal with MSARG-licensed junket operators, and that
their firms fully comply with U.S. and Macau gaming statutes
and regulations. They pointed out their inability to
investigate allegations of possible connections between
MSARG-licensed junket operators and organized crime,
particularly that occurring in the mainland.


12. (C) According to Siu, the PRC has become "very concerned"
about linkages between Macau's junket operators and organized
crime in the mainland. He said the PRC restricted Macau
visas for mainlanders, at least in part to stem the rise of
organized crime in the mainland associated with the Macau
junkets. A senior U.S. executive agreed, and noted that
provincial officials in the mainland increasingly provide
"sweetheart" deals to junket operators (e.g. land sales,
business licenses, government contracts),in exchange for
bank deposits or cash sums paid to the officials upon arrival
in Macau. He said concerns about corruption and money
laundering have also led the PRC to recently "crack down" on
money changers that allow a mainland Chinese to pay renminbi
in the mainland - whether sourced legally or illegally - and
collect the equivalent amount in hard currency in Macau.


13. (C) While the junket operators generally avoid direct
involvement in illegal activities in Macau, Siu said the
companies can easily engage criminals in Macau "to do their
dirty work." Siu commented that the Macau police force is
"afraid of triad groups" operating there. He said organized
crime leaders in Macau "know the identity of each police
force member and where they live." According to Siu, this
prompted the MSARG to recently request unspecified
"enforcement assistance" from Beijing.

MSARG's Outdated Hiring Restrictions for Dealers
-------------- ---


14. (C) The MSARG mandates that all dealers in casinos be
Macanese citizens. Given Macau's significant projected
gaming capacity additions, the gaming industry's demand for
Macau citizen dealers is expected to significantly outstrip
supply. Jay Dee Clayton, Executive Vice President of
Operations at Wynn Macau, told EconOff that casino operators
will "find it difficult to hire the thousands of entry level
dealers this market will need." He said the MSARG's hiring
restrictions have started to damage his dealers' career
development, as Wynn hesitates to promote its increasingly
valuable dealers into middle management. Grant Bowie,
President of MGM Grand Macau, agreed. He added that the
MSARG's Macau-citizen-only dealer restriction "dumbs down"
the citizens of Macau by limiting their promotion
opportunities and narrowing the skill sets of Macau's
workforce. Macau's 20,000-plus dealers earn an average of
USD 1,700 (MOP 13,226) per month. This exceeds Macau's

HONG KONG 00001962 004 OF 004


median wage by 65 percent. In Macau, high school dropouts
earn more as card dealers than new college graduates in
nearly every profession.


15. (C) Bowie described how the dealer hiring restrictions
are negatively affecting a new Small and Medium Enterprise
(SME) Initiative begun by AmCham Macau's gaming industry
members. Under the initiative, the Big Three American gaming
companies (LVS, MGM and Wynn) agreed to foster procurement of
goods and services from locally-owned businesses. Bowie
said, "But, the SMEs can't find qualified local staff," to
produce the goods and services. He said this negatively
impacts the local SMEs' ability to deliver products and
services in a manner that meets the high demands of U.S.
gaming companies.
DONOVAN