MACAU'S MORATORIUM ON NEW CASINOS LESS THAN MEETS

UNCLAS SECTION 01 OF 03 HONG KONG 000793 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/CM AND EEB/TPP/BTT E.O. 12958: N/A TAGS: CH ECON ETRD MC EINV SUBJECT: MACAU'S MORATORIUM ON NEW CASINOS LESS THAN MEETS THE EYE ¶1. (U) Summary: Macau Chief Executive Edmund Ho, acting on "instructions", announced an immediate moratorium on new casino development in the Special Administrative Region (SAR) on April 22. No new casino concessions will be granted in the near future, no new leases for casinos will be approved, and future land reclamation areas will be off limits to gaming businesses. The government will not accept any applications for additional gaming tables at existing casinos. Local observers and existing gaming concession holders welcomed the announcement, noting the need for Macau to improve its existing infrastructure to cope with the current rapid expansion of the tourism and gaming sector. While overall gaming revenues continue to rise to record levels, some casinos have begun to see slowing or even declining receipts as tourist growth slows and new competitors come on line. Ho's announcement will not affect plans already approved by the government to add eleven additional casinos in the next three years. Macau currently has 29 casinos which took in a record 29.8 billion patacas (apx. US$3.7 billion) in the first quarter of 2008. End Summary. ¶2. (U) Comment: Explosive growth since opening the gaming sector in 2002 has placed unavoidable strains on the people and infrastructure in Macau. Most Macanese welcome the economic expansion that has allowed per capita GDP to surpass that of neighboring Hong Kong, but unquestionably that Macau could use some time to adjust to its new status as a global gaming and tourism capital. The government has plenty of money but proposals to encourage students to stay in school, resolve transportation bottlenecks, and meet increased demand for health care will take time to implement. Despite Chief Executive Ho's announcement, the pressure on Macau's infrastructure is not going to abate any time soon. Eleven new casinos, including several "mega-resorts" are slated for completion by 2010. Tourist arrivals were virtually stagnant in the first quarter of 2008, but the number of Chinese tourists continued to increase, suggesting reported visa restrictions are not having much effect. Macau risks becoming solely dependent on tourism and gaming and could be vulnerable to a sudden slowdown due to an economic, health or security-related event. The "moratorium" will not slow gaming growth in Macau in the near term and leaves unanswered the question of how to diversify Macau's economy. End Comment. ============================================= ===== Ho Announces Freeze on Additional Gaming Approvals ============================================= ===== ¶3. (U) Macau Chief Executive Edmund Ho, in an April 22 question and answer session with the Macau Legislative Assembly, announced an immediate freeze on approvals for all new casino developments in Macau. Macau will not accept land lease applications from gaming companies and will not expand the number of gaming concessions from the current three concessions and three sub-concessions "for a certain period of time." Ho added that future land reclamation areas will not be available to gaming operators. These decisions were based on "instructions" from Chinese President Hu Jintao in March, during a meeting on the margins of the National People's Congress, said Ho. (Note: Macau has the highest population density of any territory in the world, with almost 540,000 residents living on just 29.2 sq. km. Land reclamation has long played an important role in Macau's development; the territory of the SAR has grown by 22.6 percent since 1999 and Macau recently submitted reclamation plans for five additional sites to Beijing for approval. End Note) ¶4. (U) Ho told legislators that the Macau government is currently conducting a study on the need to control the number of casinos, gaming tables, slot machines, and junket operators. He added that slot machines would be moved away from residential areas and that applications from existing gaming companies for additional gaming tables or gaming facilities would be rejected. Licenses for new junket promoters will not be approved, pending release of a study on the proper supervision of the sector. The government will also draft a bill to limit the maximum commissions allowed for gambling promoters, said Ho. ============================================= === Moratorium Helps Revenues, Won't Slow Development ============================================= === ¶5. (U) Although the timing was a surprise, observers and HONG KONG 00000793 002 OF 003 existing casino operators in Macau were generally pleased about Ho's announcement. Paul Tse, President of AmCham Macau and CEO of property development company Ocean Gardens, predicted the moratorium would be welcomed by Macau residents. With 2007 GDP growth over 27% and 27 million visitors last year, Macau's transport and social services infrastructure is feeling the stress. The SAR needs time to absorb the current expansion before encouraging additional gaming sector growth, he said. (Note: Macau played host to 7.5 million tourists in the first quarter of 2008, almost unchanged from Q4 2007. Chinese tourist arrivals increased slightly, but were offset by fewer tourists from Hong Kong, Taiwan and Southeast Asia. End Note) PBL/Melco's Crown Casino Chief Financial Officer Keith Heise noted that the moratorium isn't as stiff as it sounds. Macau currently has 29 casinos with over 4,300 gaming tables. The eleven new casinos already under construction are not affected by the freeze. Several of these will be very large, including Crown's own City of Dreams, Galaxy's Cotai Mega Resort, the Four Seasons and Sheraton Hotels, and the expansion of the Venetian. These projects are all scheduled to come on line no later than early 2010, bringing the total number of casinos in Macau to forty. ============================ A Very Expensive Golf Course ============================ ¶6. (U) University of Macau legal scholar and gaming regulations expert Jorge Godinho also supported CE Ho's announcement. He was not surprised that existing concession holders would welcome the moratorium on new casinos, noting that the share prices of the listed gaming companies active in Macau had all risen on the news. Godinho suggested that the current concession-holders may have been lobbying Ho to announce a freeze on new concessions. U.S. gaming and entertainment company Harrah's paid US$578 million for the Oriente Golf course in Macau in September 2007, giving rise to rumors that the government might consider allowing another gaming concession. One Wall Street analyst reportedly speculated at the time that Harrah's had either purchased a "very expensive golf course or a very affordable piece of prime casino-resort land in the world's largest gaming market." Ho's reference to his conversation with Chinese President Hu in his announcement short-circuited any opposition to the freeze and illustrated just how closely Beijing is watching events in Macau, said Godinho. Harrah's responded to Ho's announcement with a press release reaffirming their plans to run "a world-class golf course in Macau." ============================================= ===== Is Competition Starting to Squeeze Casino Margins? ============================================= ===== ¶7. (U) Casino receipts in Macau rose by 62 percent in the first quarter of 2008, reaching a record 29.82 billion patacas (over US$3.7 billion). Despite the record quarter, some casinos have reportedly begun to see revenue growth slow or even drop slightly. The Chairman of Hong Kong-based A-Max Holdings, a junket operator listed on the Hong Kong Stock Exchange, told the press that Ho's announcement reflected the government's realization that the gaming sector is reaching saturation in Macau. He added that some casinos are starting to have problems attracting gamblers and predicted that some may scale down or close in the near future. Heise said that Crown saw a slight drop in the number of gamblers in March 2008, but attributed the slowdown to changes in Chinese visa policy and seasonal factors rather than competition from other casinos. He noted that the new casinos in Macau are being built around tourist and entertainment amenities (Macau will soon host three permanent Cirque du Soleil shows) that invariably cut into gaming company profit margins. He welcomed Ho's announcement that the MSAR would consider limits on junket commissions; these commissions are another dent in casino margins. ===================================== Casinos Hoping for More Foreign Labor ===================================== ¶8. (U) With transportation and social services sectors are already under significant strain, the eleven projects currently underway may be too many, said Godinho. Lack of human resources remains the biggest obstacle to Macau's continued growth. Macanese worry that allowing foreign workers into Macau will suppress wages, but casinos claim HONG KONG 00000793 003 OF 003 additional foreign laborers, including Chinese, are urgently needed to fill vacant positions. Macau's current unemployment rate has fallen below 3 percent, suggesting the casinos may have a point. ¶9. (SBU) Heise separately noted that Crown is having difficulty filling skilled positions like accountants and auditors in its current operations. Crown's human resources managers prefer to hire a significant number of overseas workers because their visa status makes them less vulnerable to poaching by competitors. He lamented that current Macau regulations make it difficult to recruit Chinese workers to fill positions in the casino as dealers or security officers. The Venetian has already established a dealer training school in nearby Zhuhai, just across the border in Guangdong Province, in preparation for the lifting of the prohibition on non-Macanese dealers, said Heise. Marut