GOVERNMENT GAMBLE ON GROWTH PAYS OFF By Tom Mitchell
Tuesday, June 19, 2007
Even the most gifted comic novelist would struggle to do justice to Macao and the cast of characters who have flocked to what is now the world's largest gambling market.
In the five years since the former Portuguese colony's gaming industry was liberalised, ending Stanley Ho's 40-year monopoly over the sector, gambling revenues have grown 155 per cent – from $2.7bn in 2002 to $6.9bn last year – when Macao eclipsed the Las Vegas strip as the gambling capital of the world.
Over the same period the number of casinos operating in the Chinese special administrative region, situated an hour's ferry ride west of Hong Kong, increased from 11 to 25, and includes new properties built by some of the world's best known gaming companies including Sheldon Adelson's Las Vegas Sands, Steve Wynn's Wynn Resorts and James Packer's Publishing and Broadcasting. MGM will enter the market later this year with the opening of its first Macao casino.
“None of us has ever been in a place that has been developing so fast,” says Gabriel Donleavy, dean of the University of Macau's business school. “It's like you're living in a spaceship, in a way, because of the pace of acceleration.”
Like all gold rushes, Macao has attracted a raucous and colourful community. At the top of the territory's social ladder, Mr Ho, Mr Adelson and Mr Wynn are all evidence of the gaming industry's ability to produce some of the most intriguing bosses in the business world.
Mr Ho is popularly known as the “King of Macao” and appears to take the nickname very seriously. Last month the Hong Kong-born tycooon paid $1.76m for the 17th century throne of Kangxi, a Manchu emperor who ruled China for 61 years. He intends to display the cultural treasure in his Grand Lisboa casino, a neon and glass structure designed in the shape of a lotus flower and bulb.
Mr Ho's fourth wife, Angela Leong, is an unlikely member of Macao's legislative assembly. Also a fixture on Macao and Hong Kong's high-society circuits, Ms Leong is shadowed by a bodyguard who totes both a firearm and his employer's latest Louis Vuitton handbag.
Other people about town include a motley crew of young American entrepreneurs on the make, seeking their fortunes in a city that is trying to build in 10 years what Las Vegas did in 40, and even Kim Jong-nam, the eldest son of North Korean dictator Kim Jong-il. Kim junior is a frequent visitor to the territory, where his ex-wife and two children reside.
According to one friend of the family, Mr Kim's fondness for Macao dates back to at least 2001, when he was caught trying to enter Japan – ostensibly to visit Tokyo Disneyland – on a fake Dominican Republic passport. Humiliated, the dictator's son sought refuge in Macao until the furore blew over. “He couldn't go home after that,” says the family friend.
At the other end of Macao's social spectrum, priests, nuns and social workers run schools, hospitals and shelters in a community where the social welfare network is patchy at best. Such volunteers tend to have a different perspective on the effects that so much investment pouring in so fast is having on so small a community.
While Macao's casino industry has tripled in size in the seven years since China resumed sovereignty over the territory in December 1999 – and tourist arrivals have more than doubled to 22m annually – the city's population has increased by just 20 per cent to 513,000.
Companies across the territory are struggling to attract and retain workers, yet local interest groups are up in arms at labour imports – legal and illegal – creating a vicious cycle that is ratcheting up the pressure on Macao's infrastructure.
“We need a U-turn,” says Paul Poon, a social worker, educator and director of Caritas, a Catholic social services agency. “We can't develop casinos at this speed forever. We need to slow down.”
“There was always going to be this issue of how the locals perceive Macao's success and how the outside world perceives Macao's success,” adds Grant Chum, head of conglomerates research with UBS in Hong Kong.
“There just aren't enough people in Macao and [the casino industry's growth] is distorting the social matrix. You've also created huge speculation in the Macao property market.”
Even industry participants agree that the pace of investment is putting enormous strain on Macao's inadequate transport network and tiny labour market.
“In the space of 18 months, everything has gone beserk,” says Sean Monaghan, head of gaming research at Merrill Lynch. “How do you bring forward the build-out of infrastructure? The sooner you deal with this, the lower the operational risk.”
Stephen Weaver, Las Vegas Sands' vice-president for Asia, says: “The transformation of Macao relies on having a sufficient supply of labour. We think there's no question that when we employ someone [from Macao] we take them off another employer.”
The strains Macao is experiencing are rooted in the government's decision to double the number of casino licences from three to six.
In 2002 concessions were awarded to the incumbent, Mr Ho, whose Sociedade de Turismo e Diversoes de Macau had monopolised the industry for 40 years; Wynn Resorts; and a joint venture partnership between Lui Che-woo, a Hong Kong construction materials and property tycoon, and Mr Adelson's Las Vegas Sands.
According to current and former executives at both companies, Mr Lui and Mr Adelson's venture quickly ran into difficulties. In addition to their considerable egos, both men had fundamentally different visions of the business they were building.
Because the licence resided with Mr Lui's Galaxy Entertainment, the Hong Kong tycoon was in the driver's seat and Mr Adelson “was prepared to walk”.
From the Macao government's point of view, his exit would have been the worst possible outcome. The government wanted Mr Adelson's convention expertise – he started the world-famous Comdex computer trade show in 1979 – to help transform Macao from a down-at-heel market for day-tripping punters to a world-class convention, entertainment and gaming destination. The Sands was therefore granted a “sub-concession” and allowed to go its own way.
But that decision presented Macao with yet another dilemma. “When Mr Wynn started he was one of three,” says Grant Bowie, president and general manager of Wynn Macau. “[The government's decision] created four operators. They solved a problem but also created others.”
Mr Chum, at UBS, calls it a “classic case of unintended consequences”.
To mollify Mr Wynn and Mr Ho, both were allowed to sell one sub-concession apiece. Both went to joint ventures involving Mr Ho's children, giving Macao's most powerful family three of the six licences. A joint venture between Mr Ho's daughter, Pansy, and MGM paid the tycoon $200m for his sub-concession in April 2005. A year later, another joint venture pairing Mr Ho's eldest son, Lawrence, with Mr Packer's PBL paid Wynn resorts $900m for its sub-concession.
The Wynn transaction was a huge coup. In a single stroke, the Las Vegas mogul recouped three-quarters of the cost of his first Macao property – the $1.2bn Wynn Macau, which opened last September. Lawrence Ho, however, is confident that he and PBL did not overpay for the last seat in the house. “I think the price MGM and Pansy paid was not a market price,” he says. “It was a ‘friendly insider' price.”
The windfalls reaped by Mr Wynn and, to a lesser extent, Stanley Ho were controversial in their own right. “The right to operate casinos belongs to Macao,” observes Mr Chum. “It doesn't belong to the licence holders. The benefit [from the sub-concession sales] has accrued to the concessionaires rather than the people of Macao.”
Others defend the Macao government's history of pragmatic policy adjustments, noting that Mr Wynn and Mr Lui did not open their first flagship Macao properties until the second half of last year. Stanley Ho's Grand Lisboa was inaugurated only in February.
Mr Adelson, by contrast, opened the Sands Macao in May 2004, demonstrating the depth of the territory's mass-market. And his $2.3bn Venetian, which opens in August, will be the territory's first full-scale “integrated resort”.
Without Sands pushing the envelope, they argue, Macao's development would have been nowhere as rapid as it has been. “We're not very cautious people,” says Mr Weaver. “If we were afraid of risk we wouldn't be here.”
