Gaming | Analysis Macau too crowded for more casinos?

Little information is expected from the administration on the future of Macau gaming before incumbent Chief Executive Chui Sai On hands over the keys to his likely successor Ho Iat Seng in December. But as the 2022 concession expiry date looms closer, analysts are starting to weigh in on the possible scenarios.

Moody’s Investors Service said last week that it expects Macau will renew or reissue the concessions for its six gaming operators after they expire in June 2022. While there may be changes made to the existing agreements, analysts at the firm concluded that “an outright rejection of concessions is very unlikely.”

Gaming ‘bosses’ Alvin Chau, David Chow and Chan Meng Kam, who operate on the fringes of Macau gaming, have all signaled an interest in pursuing a license should one open up in the 2022 tender. The opportunity has also piqued interest further abroad from Jay Chun’s Paradise Entertainment Group and Genting Bhd, headquartered in Malaysia.

Much is at stake for everyone involved.

The sector accounts for about half of the city’s economic output, directly employs about 15% of its workforce, and generates more than 80% of the government’s fiscal revenues. The industry pulled in more than MOP300 billion ($37.15 billion) in gaming revenue in 2018. Five out of Macau’s six casino operators call the SAR their primary market or derive the majority of their revenue from the city. The sixth – MGM – still earns almost 20% of its revenue from the city, according to its annual statement last year.

By virtue of its size, Macau is already a competitive market where even a percentage point drop in market share can signal millions in lost revenue.

One common measure of market competitiveness is the Herfindahl-Hirschman Index (HHI). It examines the number of operators in a sector and their relative market share and calculates a measure of competitiveness between 0 and 10,000, where 0 indicates perfect competition and 10,000 implies a perfect monopoly.

In some countries, such as the United States, the measure is used by the authorities in the process of reviewing merger and acquisition requests. The U.S. Department of Justice considers a market with an HHI of less than 1,500 to be a ‘competitive marketplace,’ an HHI of between 1,500 and 2,500 to be a ‘moderately-concentrated marketplace,’ and an HHI of 2,500 or greater to be a ‘highly-concentrated marketplace.’

In Macau, mergers and acquisitions of local casino operators are restricted by a law that prevents one market player from owning 5% or more of another.

The local gaming sector is controlled by six non-discreet players: Sociedade de Jogos de Macau (SJM), Galaxy Entertainment Group, Wynn Resorts, Las Vegas Sands, MGM and Melco Resorts and Entertainment.

Using data from the first quarter of this year, the Times calculated that the HHI score for Macau’s gaming sector would stand at 1,819, indicating a ‘moderately-concentrated marketplace’ as per the U.S. Department of Justice qualification.

By contrast, in Singapore, where Genting’s Resorts World Sentosa and Marina Bay Sands co-exist in a duopoly enforced by the state, the HHI was 5,162 in the first quarter of this year.

The HHI does not take into account the nature of government concessions, which some argue can be a guarantee of service quality and consumer care by themselves.

Local economist Albano Martins said the entry of new players into Macau’s gaming landscape will not depend on whether the market is deemed competitive or not, but rather the limited available land for casino development.

“For sure, the index is not lower because the market is not open,” Martins told the Times. “But this doesn’t mean that the market is not competitive between the six concessionaires. We have no conditions to have a more free market because of [limited] access to resources, both land and human.”

Martins also said that more casino operators – and by extension casinos – would likely entail rising salaries and price inflation in the Macau SAR. Both would have a negative effect on small- and medium-sized enterprises.

Union Gaming Group analyst Grant Govertsen agreed that the Macau gaming sector was already competitive, even with just six players.

“The market is already quite competitive and over time will only become more competitive as certain operators continue to outperform others and thus causing the under-performers to become more competitive,” he said. “If Macau were to introduce additional competition, where would they build? There simply isn’t much available land that is approved for gaming development.” Daniel Beitler & Lynzy Valles