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The Biggest Gamble: Can Macau Beat the Odds?

Despite a slowdown in China, the world's largest gaming center is doubling down on its future.

Barely 10 years ago, Francis Lui and his family were building a relatively modest fortune largely from quarrying rock in Hong Kong and processing slag from blast furnaces on mainland China. Today, in the Chinese enclave of Macau, they preside over two palatial casinos that alone generate vastly more gaming revenue than the entire Las Vegas Strip. They're also acquiring a stake in the Monaco royal family-controlled company that operates the Casino de Monte-Carlo.

And yet standing beneath the 24-karat gilded cupolas atop the white-and-gold towers of his flagship, 3,800-room Galaxy Macau resort, Lui insists his journey from grit to glitz hasn’t changed his low-key lifestyle. “Personally, I’m not a gambling man,” he says.

In one sense, that may be true. Lui, 59, prefers walking the family dog to playing high-stakes baccarat or poker. He even hesitates before picking up a deck of cards for a photo shoot. But in reality, the soft-spoken, U.S.-educated billionaire is in the process of placing a far bigger bet than any of the high rollers who wager as much as $250,000 a hand in the Galaxy’s most exclusive VIP rooms. Having just spent $3.1 billion doubling the size of the Galaxy, he’s now pressing ahead with another $7.4 billion worth of investments. And that’s just a part of the $27 billion that global casino companies such as Las Vegas Sands, Wynn Resorts, and MGM Resorts International plan to spend over the next few years in the world’s largest but most-troubled gaming market.

This story appears in the September issue of Bloomberg Markets magazine.

Macau, an autonomous, 30-square-kilometer (12-square-mile) former Portuguese colony of just 640,000 people, is bigger than any other gaming center because the government in Beijing allows it a casino-gambling monopoly in the world’s second-largest economy. It’s now in big trouble because it’s on the front line of seismic political, economic, and social developments taking place across the border.

A massive corruption crackdown by Chinese President Xi Jinping has scared off Macau’s best customers—big spenders who fear they’ll be accused of using the territory’s 35 casinos and numerous luxury shopping malls to spend or launder ill-gotten gains. Last year, these so-called VIPs accounted for 70 percent of all Macau casino takings. Now, the junket operators who used to bring them to Macau are luring at least some of their clients to other Asia-Pacific gaming destinations, including the Philippines, South Korea, Singapore, Australia, and Cambodia.

Macau’s casino owners are also battling a range of increasingly stringent government regulations, ranging from a restriction on the number of gaming tables they can add at new properties to a smoking ban that will force customers as addicted to nicotine as they are to baccarat to spend less time gambling.

It all adds up to a massive slump—just as Lui and his rivals are embarking on a major expansion. Macau’s gaming revenue plummeted 37 percent to $15.2 billion in the first half of the year. During the 18 months ended in June, the decline wiped more than $100 billion from the value of six of the world’s biggest casino companies. From its January 2014 peak, the Bloomberg Intelligence Macau gaming index had plunged 57 percent as of July 28. In a March 18 report on Macau’s implosion, Hong Kong–based investment bank CLSA described it as a “death spiral.”

Before the collapse, Lui’s father, Galaxy Entertainment Group Chairman Lui Che-woo, 85, was Asia’s second-richest individual, with a fortune of $22.5 billion, largely a result of the family’s 45 percent stake in the company. By July 27, the elder Lui was almost $12 billion poorer, according to the Bloomberg Billionaires Index.

Shown amid the grandeur of the Galaxy casino, Francis Lui says he prefers

walking the dog to playing high-stakes baccarat.

Photograph: Peng Yangjun/Bloomberg Markets

Undeterred, Francis Lui, who as Galaxy deputy chairman runs the world’s second-biggest listed casino empire on behalf of his father, says he can restore investor confidence. He’s wagering that the consumer revolution in China will ultimately trump the impact of the corruption crackdown. Since 1978, 500 million Chinese citizens have emerged from poverty, according to the World Bank.

Although the government is determined to stanch the flood of illicit money leaving the country, it also wants to boost growth and is encouraging legitimate spending by a newly enriched middle class in tourist destinations such as Macau. “We are living here in Macau in one of the biggest economic consumer experiments in the world,” says Grant Bowie, CEO of MGM China Holdings, which next year will open its second Macau casino.

Macau’s fate may be tied to developments on Hengqin, an island triple its size that’s located across a narrow strait. Galaxy is the first of Macau’s six casino licensees to acquire land on Hengqin, which is part of Guangdong province and which Beijing wants to develop into a nongaming leisure destination full of golf courses, Disney-esque theme parks, and other family-focused attractions. In planning a $1.6 billion, 2.7-square-kilometer resort, Lui is betting that Macau—which is linked to Hengqin by a six-lane bridge—can transform itself from a destination whose resorts are more than 90 percent dependent on gambling revenues to a global entertainment hub combining the allure of two of America’s most popular destinations. “It will be like having Las Vegas and Orlando, Florida, right next to each other instead of 2,000 miles apart,” Lui says.

While even a struggling Macau may well generate at least five times the gaming revenues of Las Vegas this year, it won’t be easy for the territory to surpass the desert metropolis as an entertainment center. Macau is far less diversified than Vegas, which last year earned most of its resort revenue, 64 percent, from shows, hotel rooms, restaurants, and other nongaming sources.

A clutch of the world’s most colorful tycoons are betting big on Macau. They include American billionaires Steve Wynn and Sheldon Adelson. Wynn Resorts and Adelson’s Las Vegas Sands earn more than twice as much casino revenue from Macau as they do from their home market. Then there are the heirs to the estate of the late Kirk Kerkorian; in June, they inherited a 16 percent stake in MGM Resorts International, which derives about one-third of its revenue from the territory. Australian billionaire James Packer’s Melbourne-based Crown Resorts gets almost half its income from Macau.

The city also remains the main business base of three members of the billionaire Ho dynasty, whose patriarch, Stanley Ho, ran gaming in the territory for 40 years before losing his monopoly in 2001. Stanley Ho, now 93 and the father of 17 children, is chairman of SJM Holdings, which owns 20 Macau casinos, including the flagship Grand Lisboa. A daughter, Pansy Ho, 53, is a partner with MGM and co-chairman of its China unit. And a son, Lawrence Ho, 38, is co-chairman and CEO of and a partner with Packer in Nasdaq-listed Melco Crown Entertainment, which operates a casino and hotel complex named City of Dreams.

These multinational magnates are investing heavily to provide nongaming entertainment, extra hotel rooms, and more shopping for the new mass-market clients they hope to attract. In Lui’s case, that meant doubling the size of a casino that’s been open for only four years. Designed like a high-rise Southeast Asian potentate’s palace, the Galaxy now sprawls over a square kilometer or so of what’s becoming Macau’s main gaming precinct, Cotai. Lui has increased the number of hotels inside the Galaxy complex from three to six, including the world’s first all-suite Ritz-Carlton. Now, he plans to double down again by developing an adjoining chunk of prime land in Macau before starting work across the water on Hengqin.

Galaxy casino personnel await the arrival of guests.

Photograph: Peng Yangjun/Bloomberg Markets

Lawrence Ho and Packer’s Melco Crown plan to open their $3.2 billion Studio City resort later this year, accompanied by a Martin Scorsese-directed promotional film starring Brad Pitt, Leonardo DiCaprio, and Robert De Niro. The still-incomplete Hollywood-themed, Gotham City-like art deco building features what the company says is the world’s first Batman flight simulator. Out back is what Ho and Packer say is Asia’s tallest Ferris wheel, in the shape of a figure eight.

In March, Steve Wynn is due to open a second Macau casino, the $4 billion Wynn Palace. Later in 2016, MGM China, which has had the MGM in downtown Macau since 2007, plans to open a $3 billion, 1,500-room casino built in rectangular blocks to resemble a stack of Chinese jewelry boxes. Also next year, Adelson, whose flagship, eight-year-old Venetian features an indoor Grand Canal plied by singing gondoliers, will open the $2.7 billion Parisian with the requisite Eiffel Tower replica out front. Stanley Ho’s SJM has also turned to France for inspiration. Scheduled to open in late 2017, its $4 billion, 2,000-room Lisboa Palace is partly modeled on Versailles.

It all sounds like a pharaonic exercise in overbuilding. And yet tiny Macau, with only 27,000 hotel rooms, compared with Las Vegas’s 150,000, attracted 31.5 million visitors last year, two-thirds of them from the mainland and many of them day-trippers. The new construction aims to add 19,000 more rooms by 2018.

Macau needs to expand capacity if it is to attract enough mass-market gamblers to offset the dwindling number of high rollers. Even some of the most experienced and successful casino tycoons are “sailing in uncharted territory,” as Adelson, 82, acknowledged on a conference call in April. Adelson’s Las Vegas Sands is the world’s biggest gaming company, and his behemoth Venetian casinos in Las Vegas and Macau have made him the world’s 29th-richest individual. Wynn picked up Adelson’s theme a few days later in his own teleconference. “Uncertainty,” he said, “is the plaguing word of the day in Macau.” Then Packer chimed in. Speaking about the corruption crackdown, he said in May, “When and how that ends, no one knows.”


Photograph: Peng Yangjun/Bloomberg Markets

Amid this uncertainty, some investors glimpse opportunity. Mark Mobius, executive chairman of Templeton Emerging Markets Group, says the graft purge has benefited Macau. “Once they scrap the image of being a center for money laundering and other illicit activities, Macau will be transformed into an entertainment center like Las Vegas,” says Mobius, who oversees $45 billion and declines to say whether he has been buying Macau-related shares. “The casinos have to move in that direction. They don’t have a choice.”

A U.S. investor, David Winters, says his money is on Lui. “Our sense is that Galaxy will be the big winner when the clouds clear and the rain stops and the fear subsides,” says Winters, who manages $1.5 billion, including Galaxy shares, at Wintergreen Advisers. “They have built a beautiful facility, have a lot of land bank, don’t have any debt, and are ahead of the curve in providing what the government wants.”

In June, Galaxy’s share of the Macau gaming market jumped 3.8 percentage points from a month earlier to 22.2 percent, narrowing the gap with market leader Sands China, which fell 3.8 percentage points to 22.7 percent. SJM had a market share of 22 percent; Melco Crown, 14.1 percent; MGM, 10.2 percent; and Wynn, 8.8 percent. Francis Lui isn’t bragging yet. He says the big test of his new property will come in October, when China has a weeklong National Day holiday and tourist arrivals traditionally reach their height.

Having made one winning bet on Galaxy, Stephen Monticelli, founder and president of Mosaic Investments, a former hedge fund that now manages Monticelli’s own money, is betting the stock’s price has fallen enough for him to have another wager. “I first bought the stock when it was trading at HK$2 and sold at between 8 and 14 dollars,” Monticelli says. Since then, Monticelli has watched Galaxy shares soar to HK$83.20 in January 2014 and then plunge. When they hit HK$38, Monticelli bought back in again. “The Luis are either brilliant or fortunate,” he says. “The rules in Macau are that Beijing makes the rules, and Galaxy fits exactly in with what Beijing wants Macau to become.”

Not that Monticelli is ever entirely sure what Beijing’s rules are. “Trying to understand Beijing is like trying to read tea leaves through frosted glass.”

That’s the biggest conundrum facing the casino companies: the Chinese government’s attitude to Macau and the foreign companies that operate there. Grant Govertsen, a Macau-based analyst at Union Gaming Group, a Las Vegas investment bank, doesn’t believe the anti-corruption crackdown was aimed specifically at Macau. “Macau was just collateral damage—but pretty significant collateral damage,” he says.

Macau’s former business model didn’t impress Xi. In December, China’s leader paid an official, two-day visit to Macau to celebrate the 15th anniversary of the territory’s return to Chinese rule. On part of his trip, Xi stopped in at a People’s Liberation Army firing range for some target practice. But more important, he also took aim at Macau’s slavish dependence on Chinese gamblers, saying the city should diversify to position itself as a global tourism and leisure hub. “Certain deep-seated problems formed over the years have surfaced,” Xi said, without mentioning the gaming industry directly.

He didn’t need to. The Macau government promptly announced what it described as a “midterm review” of the six companies with gaming licenses whose 20-year concessions expire from 2020 to 2022.

While many analysts believe all the gaming licenses will be renewed, Hong Kong–based political and corporate risk consultant Steve Vickers isn’t so sure. “It cannot be assumed as a given that all of the existing six concessionaires—especially the foreign ones—will retain their concessions, at least as currently structured,” says Vickers, who’s CEO of Steve Vickers & Associates. One possible outcome, he says, is that the government will award another concession to a Chinese company—making the competition even more cutthroat.

Barely a year ago, the casino companies’ big bets on Macau would not have seemed very risky. Once a crumbling, crime-ridden colonial outpost where the only attempts at refinement were “no spitting” signs in the casinos, Macau transformed itself following its return to China in 1999. In 2001, Stanley Ho’s monopoly ended, and the five other casino companies entered the fray.

All the newcomers had experience running casinos except the Luis, who had made their money through quarrying, construction, and slag before branching into hotels. Despite their lack of experience, Lui Che-woo had good connections in China. He had served on the Chinese People’s Political Consultative Conference, a government advisory body, and had even had an asteroid named after him by Chinese scientists.

As new casinos opened, Macau embarked on a decade of explosive growth. In 2006, it overtook the Las Vegas Strip to become the world casino leader, with $7.1 billion in revenue. By 2013, that figure had increased to $45 billion—seven times that of the strip. Last year, Lui’s two most important casinos, Galaxy and the smaller StarWorld, alone took in $9 billion, compared with combined revenue of just $6.4 billion for the 41 casinos on the Vegas strip. For at least part of its winning run, Macau was also the world’s best-performing economy, surging 26.2 percent in 2010.

Then, late last year, Macau’s fortunes equally spectacularly reversed direction. In addition to the corruption crackdown, the sharply slowing Chinese economy—down to 7 percent growth in the second quarter of 2015 from an average of 9.8 percent since 1978—deterred some visitors. And a Chinese stock market bubble provided unwelcome competition for punters who discovered they could get as many thrills from betting on roller-coastering Shanghai- and Shenzhen-listed equities as they could from traveling to Macau to play baccarat, blackjack, roulette, and the Chinese dice game sic bo. Gross domestic product in Macau shrank by 25 percent in the first three months of this year, making the world’s biggest gaming hub the world’s worst-performing economy.

Amid this slump, the Luis aren't just expanding in and around Macau. On July 25, they announced that Galaxy is acquiring 5 percent of Société des Bains de Mer et du Cercle des Étrangers à Monaco, or SBM, the 152-year-old company that owns the Monte Carlo casino indelibly linked in popular culture with the suave fictional secret agent James Bond. "It helps us build our profile in a global sense," Galaxy's vice president for investor relations, Peter Caveny, says of the deal. SBM, which is listed on Euronext but is majority owned by the principality of Monaco, also disclosed that LVMH Moet Hennessy Louis Vuitton is separately taking a similar stake.

Has Macau bottomed out? The territory does have some things going for it. Sometime within the next five years, a 36-kilometer-long (22-mile-long) bridge will span the Pearl River Delta to link Macau with Hong Kong. So instead of having to take an hourlong boat trip, Hong Kong visitors will be able to drive there. Most important, Hong Kong’s airport, which handles 63 million passengers a year to Macau’s 5.5 million, will essentially become Macau’s local airport, a mere 30-minute drive away. “It’s going to be a game changer for Macau,” says Union Gaming’s Govertsen.

Another factor in Macau's favor: Mass market gamblers, although they bet less than the disappearing high rollers, actually provide the gaming companies with a higher profit margin because the casinos don't have to pay commission to the VIP junket operators. Evidence of this came on July 22 when Sands China, which has the biggest share of the mass market, reported a second quarter profit that, although down 30 percent, beat analysts' estimates. Wynn Resorts will release its second quarter results on Wednesday in Las Vegas.

Macau’s history shows the gaming industry and the economy can change with lightning speed. Such was the case during the global financial crisis, when Galaxy’s share price plunged 94 percent and Las Vegas Sands teetered on the brink of bankruptcy before swiftly rebounding. Govertsen says he’s advising clients that the current descent may be bottoming and they should stay in the market. “When the recovery comes, it will be pretty sharp,” he says. “And the risk of continuing to be negative on Macau is that you could miss a lot of it.”

Back at the Galaxy casino, Francis Lui has no doubt—suggesting he’s more of a gambling man than he lets on. Asked to pose for a photograph holding a king of spades, he discards the card instantly in favor of one of the four in the deck that has a higher value. “We’re going to ace it,” he says.

This story appears in the September issue of Bloomberg Marketsmagazine. With assistance from Edward Robinson.

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