The next few years are set to be the most crucial period ever in the Asian gaming industry – one which will lay the ground rules for decades to come in the world’s largest gaming market and what’s set to become the world’s second largest.

Macau and Japan seemingly have very little in common – the former has had casino gaming for centuries while the latter seems to have taken that long to create its own much vaunted casino industry. But what they do have in common is that both jurisdictions are about to enter a period where they’ll be forced to make a myriad of monumental and long-lasting decisions in their respective licensing processes.

IAG takes a closer look at where the pair currently stand.

KING OF THE HILL: MACAU

Almost two years after Macau’s so-called downturn reached its lowest ebb in June 2016, the city is booming again. Gross gaming revenue, having fallen to a six-year low (MOP$15.88 billion) that fateful month, has now enjoyed 22 consecutive months of year-on-year growth with March GGR reaching MOP$25.95 billion.

For the first three months of 2018 combined, revenue grew 20.5% to MOP$76.51 billion – the best quarterly result since 3Q14. There is even remarkable parity between segments, with mass gaming revenue up 20.1% and VIP up 21.0% in the first quarter. Union Gaming analyst Grant Govertsen estimates that each contributed between US$4.4 billion and US$4.5 billion (MOP$35.6 billion to MOP$36.4 billion) for the period, “Good news on dual fronts” with VIP now sitting at a sustainable level and mass “more robust than many had given it credit for.” Macau’s outlook through 2018 and 2019 is undoubtedly sunny.

Yet there is one cloud looming large for Macau’s concessionaires – the impending expiration of their 20-year gaming licenses and the as yet unknown license renewal tender or re-licensing process set to ensue.

For those too young to recall, it was November 2001 when the government – keen to end Stanley Ho’s 40-year monopoly on casino gaming in Macau – called for applications for three gaming licenses to be awarded in the tiny Chinese enclave. The three winning bids were Dr Ho’s SJM, Wynn Resorts and a joint venture partnership COVER STORY between US casino operator Las Vegas Sands (LVS) and Hong Kong construction firm Galaxy Entertainment Group.

As it turned out, the LVS-Galaxy venture quickly soured and rather than endure a battle over who should claim the license, Macau’s government instead invented the concept of a “sub-concession” – thus, Galaxy retained its license while LVS essentially became Macau’s fourth licensee by claiming the sub-concession.

The same sub-concession arrangement was offered to SJM and Wynn as well, opening the door for MGM Resorts, who partnered with Dr Ho’s daughter Pansy, to claim SJM’s sub-concession while Melco-Crown – a partnership between Dr Ho’s son Lawrence and James Packer’s Crown Resorts – bought Wynn’s. Fast forward almost 20 years and all six concessions are nearing their expiration, starting with SJM and MGM in 2020 then the remaining four operators in 2022.

So what happens now? It’s a question that has been posed many times over the years and is one that doesn’t come with a simple answer. The first possibility is a brief license renewal.

Under Macau Law No 16/2001, “the duration of the concession may exceptionally be extended by reasoned order of the Chief Executive by one or more times, not exceeding in the aggregate five years.”

It is because of this law that many experts predict both SJM and MGM will have their licenses extended through 2022 to bring them in line with the other four concessionaires.

“This will give some time for the government to decide what to do next,” adds Professor Desmond Lam, Professor in International Integrated Resort Management at the University of Macau.

In theory, SJM and MGM could have their license renewed through 2025, while Galaxy, Wynn, LVS subsidiary Sands China and Melco Resorts (who bought Crown’s stake in 2017) could run until 2027. But that extra five years – after which time the concessions cannot be extended any further – would only be delaying the inevitable.

Instead, unless the law is changed, it seems far more likely that the government will initiate a public tender requiring all six concessionaires and any other interested parties to state their case to be granted a new Macau gaming license from 2022. In fact, under Section of 8 of Gaming Law 16/2001, the grant of concessions for the operation of games of fortune must be put to public tender and Macau’s Secretary of Economy and Finance, Lionel Leong, has recently hinted this will be the case.

Exactly what a public tender process might entail – or even when details might emerge – remains a mystery, despite the government stating last year that it would provide an update on the re-licensing process sometime around mid-2018. As Union Gaming’s Head of Asia Equity Research, Grant Govertsen, tells Inside Asian Gaming, “It is entirely likely that we will not hear anything incremental about the licensing process in the coming months.”

When we do, Govertsen adds, prospective licensees can expect a “hefty one-time fee” to be re-licensed.

Professor Glenn McCartney, Acting Associate Dean, Faculty of Business Administration at the University of Macau, predicts the licensing process will require far more than funds, with potential clauses including demonstrable provisions of non-gaming amenities as per the government’s recent push for greater diversity among Macau’s IR operators.

“There will be changes to the licenses,” he told Portuguese language publication Tribuna de Macau in an April interview.

“It is important to remember that it will be a new contest and not a renewal, so it is open to international companies to compete and all should be evaluated according to the criteria the government will use to give a numbered grade to each one.

“An area that I think should be a factor – and that has been integrated into the competition for a casino license in Singapore accounting for almost 40% of the award – is tourism development issues. These were not included in great detail in the original contest in Macau.

“This factor may make reference to the development and diversification of non-gaming, to go beyond gaming. It is an important criterion and should be well defined.”

The opening of a public tender in itself presents a myriad of intriguing possibilities, not least of which is the introduction of a seventh concessionaire, or even more. Such a suggestion seemed unthinkable only a matter of years ago when Macau’s gaming industry found itself in the midst of the downturn, but has quickly gained momentum since, with many believing a seventh concessionaire is now more likely than not.

“A seventh license feels more likely than ever, although by no means is it a lock,” offers Govertsen. “We believe there is a desire for a majority of gaming revenue to be captured by Chinese companies and with this in mind a seventh license would make a lot of sense. It could also be used as a means to tidy up at least some of the service provider casino operators.”

Likewise, The Innovation Group’s SVP of International Planning and Analysis, Michael Zhu, describes the issuance of a seventh Macau gaming license as “very likely”, particularly if a suitable Chinese company presents its case.

“The gaming market in Macau has been so successful and highly coveted in many aspects,” he says.

“With mainland China as the most contributing feeder market, there has been an increasing sense of ‘patriotism’ from China as to ‘why let the US companies reap so much profit from the Chinese wallet in China’s SAR?’.

“The US operators have contributed tremendously to Macau’s success in terms of industry expertise, operating know-how and so on, however the fully-fledged local companies have become competitive enough in these fields and even proven that they can be better in certain areas.

“Macau does not need to rely on the US giants anymore and there is no convincing reason why Macau has to maintain the current three local/three US concessionaire split. Macau is on its free will to choose what to do next, given Beijing would apparently have a lot to say on this process.”

One company that has been touted as a leading contender in this regard is Macau’s number one junket operator, Suncity. Already responsible for around 50% of Macau’s annual VIP gaming revenue, Suncity is also in the process of branching out into the world of casino operations via a 34% stake in Vietnam integrated resort Hoiana, due to launch in 2019.

In a recent note outlining a potential Suncity bid, Govertsen observed just how irresistible the company’s dual involvement in Asia as both a junket operator and casino operator could prove to be should it bid for a Macau license.

“In regards to the license rebid process in Macau, Hoiana will put them in a better position to win a license (in the event a seventh license is issued) not only because Suncity will be a bonafide IR operator with local roots, but that licensing Suncity would also repatriate VIP dollars to Macau where it provides a benefit to the local community,” Govertsen said, estimating up to US$15 billion in quarterly roll at its Vietnam IR.

“The reality is that Suncity will be in a position to redirect a real amount of VIP volume to Vietnam beginning next year. The scenario we provide herein is the equivalent of 7% of total VIP volume in Macau in 2019E.

“While it is virtually impossible to isolate the impact to Macau due to the growth in VIP in other regional markets, we think that Suncity’s transition to becoming a casino principal brings with it risks to Macau and a positive new angle for Suncity as it relates to the potential for obtaining a Macau license.”

Among the other potential bidders is, of course, Caesars Entertainment Corp – which famously chose not to apply for a Macau gaming license in 2001, then knocked back a second opportunity to buy Wynn’s sub-concession five years later. Touted as one of the biggest mistakes in corporate history, the oversight later prompted then-CEO Gary Loveman to quip, “We are the biggest gaming company in the world but we are not in the most important gaming market, because when that opportunity came, we missed it.”

Govertsen also raises the possibility of any of Macau’s current service provider casinos – operations that are essentially outsourced under the license of SJM predominantly and to a lesser extent Galaxy and Melco – applying for a full license of their own.

If this scenario were to play out, Govertsen says, it “would be a negative for SJM as that would result in a cessation of the management fees paid to SJM. It’s a minority of SJM’s profit, but could still have the potential to sting.”

There is one other game-changing scenario that presents as a reasonable possibility, particularly given recent controversies surrounding Wynn Resorts: rather than welcome a seventh concessionaire, the government may replace one of the current license holders with another. On that outcome, opinions are divided.

“I’m not expecting many surprises or, should I say, bad surprises,” offers Professor Lam when quizzed on this possibility, stating that he “doesn’t believe” any of the current concessionaires are in any danger of being frozen out once new licenses are issued.

Zhu isn’t so sure.

“With what happened to Wynn, it would not surprise me if Wynn Macau is replaced by a player (or two in the case of a seventh concession) with solid China background, while the other five will remain as-is.

“Steve Wynn’s influence, both in the industry and beyond, has been severely diminished. Especially without his involvement and influence in the bilateral politics, the Wynn brand does not have much left in Macau.”

Adds Govertsen, “Wynn, for obvious reasons, has recently increased their risk profile. However, many steps have been taken to mitigate this risk including the departure of Mr Wynn, the sale of his shares and the investment by Galaxy (which recently surprised by buying a 4.9% stake in Wynn Resorts). Otherwise, the other five feel secure.”

Galaxy’s Wynn investment throws up its own questions, including what exactly the Macau-born casino giant intends to do with its share. Govertsen suggests that Galaxy’s presence is a bonus for Wynn, eliminating some of the licensing risk overhang had Wynn continued to operate “without a takeover or significant outside investment.” In a March note, he also raised the prospect of an acquisition scenario, in which case Galaxy might buy out the entire company, sell off Wynn Resorts’ US assets then split up Macau.

“Considering Galaxy’s long-term strategic view that Cotai represents the future and will, on a relative basis, have much longer legs than the peninsula, we could see another trade go up with another entity acquiring Wynn Macau on the peninsula,” Govertsen speculated.

“Keeping Wynn Palace on Cotai would give Galaxy the premier high-end asset in that geography (further cementing their status as the premium high-end operator), while also giving them further growth pipeline in the Phase 2 site at Wynn Palace. Combined with Phases 3 and 4 at Galaxy Macau, and Broadway, this would give Galaxy no less than four major projects.”

Such a scenario seems less likely now given Wynn Resorts’ recent efforts to settle long-running legal disputes and strengthen its board following Steve Wynn’s departure. It’s also notable that Galaxy’s 4.9% stake falls just below Macau’s current 5% cap on cross-ownership.

Zhu expects that cap to remain under the government’s new licensing laws to “prevent cross-holdings from becoming too complicated.” He also believes there has been a good balance under the current concession system in regards to MGM’s Pansy Ho and Melco Resorts’ Lawrence Ho – both of whom hold a small stake in SJM.

As for other key requirements under a public tender, McCartney says, “There must be a reflection on what has happened in the last 20 years, the results, and where Macau wants to be in [another] 20 years.

“The new competition is a fantastic and unique window of opportunity to present the vision and the path to the future of tourism in the Macau SAR. I hope that these criteria will be designed accordingly.”

NEW KID ON THE BLOCK: JAPAN

After a flurry of activity since early April, the realization of the longawaited dream that is a Japanese casino and integrated resort industry is now closer than ever.

There has been plenty of uncertainty and many more delays since the passing of the IR Promotion Bill in December 2016, but we now know that Japan will host three integrated resorts in the first round with likely opening dates somewhere around 2025.

We also know that the number of casino licenses issued can be revisited after the initial seven-year period, reduced from an originally planned 10-year moratorium.

The three operators lucky enough to win one of the three licenses will pay a flat tax rate of 30% on gaming revenue, also reduced from a previously discussed plan to impose a sliding tax rate of between 30% and 50% depending on revenue levels.

As expected, the size of the casino will be limited to 3% of total IR floor space, however a prior proposal to limit the IR size to 15,000 square meters has been scrapped.

Instead, most restrictions will center around visitation by locals, with Japan residents allowed a maximum of three visits per week and 10 per month as part of the country’s measures to curb problem gambling.

Perhaps most controversial of all is the decision to impose a ¥6,000 entry fee for all residents – equivalent to US$54 – within each 24-hour period. The figure falls slightly below the ¥8,000 fee that coalition partner Komeito had been pushing for but is well above the ruling Liberal Democratic Party’s preferred ¥2,000.

Nevertheless, the combined regulations have been generally well received by the industry with Morgan Stanley analysts labelling them “better than feared.” The financial services firm also estimates that Japan’s casino market will be worth around US$15 billion annually now that the scenario has been made somewhat clearer, of which Tokyo would comprise around 40% of GGR (roughly US$6 billion in 2025) and 50% of foreigner spend assuming it hosts one of the three licenses on offer. Osaka, widely considered the strongest contender of all Japanese cities to win a license, would comprise 30% of foreign spend with a market size of just under US$4 billion annually.

Little wonder there is universal interest among operators for a slice of that pie.

Exactly what the bidding process in Japan entails remains to be seen. The LDP was due to submit its IR Implementation Bill to Japan’s Diet right around the time IAG went to print, with the goal of pushing it through before the end of the current Diet session on 20 June.

Even then, the job is only just beginning.

“We know that once legislation is passed, there’s a long process of setting everything up,” said Wynn Resorts CEO Matt Maddox late last year, before circumstances saw him take over his company’s top job. “So we’re monitoring it carefully and spending time there and developing relationships. Over the next couple of years we’ll understand the potential opportunity.”

In reality, however, the race to win a coveted Japan license began long ago. Most operators have now opened a Japan office, setting up a base from which to establish relationships with local business leaders and lawmakers.

Last August, MGM Resorts appointed former Charge d’Affaires at the United States Embassy Tokyo, Jason Hyland, as Representative Officer and President of MGM Resorts Japan. Genting Singapore – which sold off its stake in Korea’s Jeju Shinhwa World in early 2017 to focus on Japan – announced in October that it was raising ¥20 billion (US$177 million) via publicly-offered Japanese yen-denominated bonds to be used “for working capital and general corporate purposes” in pursuit of a Japanese IR. Melco Resorts stated recently that it planned to spend “more than US$10 billion” on its IR should it be granted a license.

In fact, Melco more than any other operator has exhibited by its actions just what lengths it is willing to go to in order to appeal to Japan’s decision makers, who will certainly place problem gambling measures at the top of the list when it comes to deciding who gets the nod.

Having already promised to move the entire company headquarters to Japan if he wins, Lawrence Ho and his Japan team unveiled in January a biometrics-based casino security system, MelGuard, which would verify the identity of all guests via fingerprint and facial recognition technology before allowing entry. The system would ensure the early detection of anyone excluded as a result of problem gambling or known criminal links.

“This proprietary technology demonstrates our deep commitment to developing and implementing practical solutions for the government’s ongoing consideration of how to uphold socially safe integrated resorts,” explained Melco Japan President Ako Shiraogawa at the time.

Clearly, winning a Japanese integrated resort license will be no walk in the park.