Playing for high stakes

Alexandra Harney discovers how ‘all things Macau’ have become a hotbed for investment

Mainland Chinese tourists crowd the ferry terminal in Macau, the former Portuguese colony, shouting and jockeying for position in the immigration line. They can hardly contain their excitement for what lies ahead: glittering new casinos, with their promise of instant wealth.

Tourists are not the only people excited about Macau these days. The territory’s decision to open its casino industry to foreign companies has triggered a stampede of investment, transforming not just the gambling sector but the entire economy. In the second quarter of 2004, Macau’s gross domestic product expanded 47.5% year-on-year.

Macau’s rise has implications for investors around the world, from day traders in San Francisco to property speculators in Shanghai. Its potential as China’s only legal gambling hub is already moving the share prices of US casino operators and fuelling a boom in Macau-related stocks in Hong Kong.

The frenzy began back in 2001, when Macau, a sleepy city of 450,000, known for its gang fights, deregulated its gaming industry to allow foreign investment. That decision by Edmund Ho, the territory’s first chief executive after its 1999 return to Chinese rule, ended the 40-year monopoly on casino operations held by Stanley Ho, the octogenarian Hong Kong tycoon. Sheldon Adelson, chairman of Las Vegas Sands (the company that owns the Venetian resort and casino), Steve Wynn’s Wynn Resorts, and Stanley Ho won the licences.

Last year, the Sands Macau, the territory’s first casino, opened just in time to benefit from Beijing’s decision to relax its rules on travel by Mainland tourists. The golden casino’s airy, modern interior and mammoth size were a stark contrast to the cramped and smoky atmosphere of Stanley Ho’s casinos, of which there are now 14 in the territory.

Other developments are likely to up the ante even higher. Kerry Packer, Australia’s richest man, and Stanley Ho have agreed to build Macau’s first six-star hotel. Wynn Resorts is building on a 16-acre site across from Ho’s flagship, the Lisboa. MGM Mirage is also building a casino. And Las Vegas Sands plans to develop what it calls a ‘Las Vegas-style strip in the heart of the territory in Cotai’, a patch of reclaimed land between two of Macau’s main islands, including a hotel with 1,500 rooms.

Even with only a tiny fraction of these casinos open, Grant Bowie, President and general manager of Wynn Resorts in Macau, said at a conference in late 2004 that the territory’s gambling revenues would surpass those of Las Vegas this year.

‘Macau will exceed Las Vegas Strip revenues next year. That’s despite the fact that Las Vegas is having a good year,’ he says. Las Vegas strip casinos took in about US$4.8bn in gambling revenues in 2003, against a reported US$3.6bn in Macau.

Everyone else seems to be cashing in as well. Before the rest of the world cottoned on to the trend, Macau’s property market took off, with prices doubling between 2000 and 2004. Many of the buyers were Mainland Chinese, the same investors who helped steer Hong Kong’s economy into recovery last year with their purchases of jewellery, cosmetics and property.

In Macau, the mainlanders snapped up flats in towers near the plots where the casinos would be built, sometimes for higher prices than the locals were willing to pay. Local property agents recall a group of investors from Shanghai coming down to buy up an entire residential building of flats.

But Hong Kong residents, with their passion for property, weighed in as well. One Hong Kong executive says nearly everyone in his office has purchased property in Macau. And a local property agent in Macau who focuses on commercial property says he has had interest from as far away as Europe.

The trend was not limited to property. Starting in late 2004, Macau-related stocks became all the rage in Hong Kong. Companies like Melco International Development, a floating restaurant and gaming machine group run by Lawrence Ho, Stanley Ho’s son, have benefitted from the enthusiasm for all things Macau. Melco’s shares, listed on the Hong Kong exchange, rose sharply starting in September. Shun Tak Holdings, Stanley Ho’s company, enjoyed a similar lift.

While Ho’s prospects in Macau are better than most, at the peak of the boom, in late 2004, Hong Kong investors’ excitement extended to any company that announced a plan related to the territory.

Ruili Holdings, a toy maker, was rewarded for an announcement that it was in ‘preliminary discussions with an independent third party in relation to possible acquisition of certain interests in the hotel and entertainment business in Macau’, with a 50% jump in its share price in one day. In their excitement, investors missed the proviso in the press release that Ruili hadn’t signed any agreements.

Emperor (China Concept) Investments’ shares rose 176% one day during the frenzy amid news of a tie-up with Stanley Ho. Shares in Pearl Oriental Enterprises rose before it even had a chance to unveil its investment in Macau’s newest casino, the Golden Dragon.

In the US, Las Vegas Sands’ investments in Macau helped make it the most highly valued company in the casino sector after its December initial public offering, and greatly enriched Adelson, who owns an 88% stake in the company. Wynn Resorts and MGM Mirage also enjoyed increases in their stock prices as a result of their plans in Macau.

But as with any gold rush, the Macau stock boom had to end sometime. In January, the Hong Kong exchange reprimanded Lawrence Yu, Ruili Holdings chairman, for ‘uneven dissemination of information’ after he told a small group of reporters gathered to witness his donation of a cheque to tsunami survivors that other companies where he serves as chairman might invest in Macau’s electronic gaming sector.

Comments by Stanley Ho that the boom in Macau-related companies was nearing an end triggered declines in Macau stocks and, indeed, the entire Hong Kong stock market in early January. ‘I have shied away from Macau concept stocks,’ says Joe Zhang, head of China research at UBS in Hong Kong.

In Macau, there are growing concerns about whether the territory can handle so much investment so fast. ‘We are being stuffed with all these new projects. We need people to run them,’ says one local businessman with ties to the Government. ‘The Government will be more selective in the casino [investors] they want to bring in.’

Executives in the garment-making business, one of Macau’s pillar industries, say they are resorting to ferrying in staff from Hong Kong because the local white-collar workers are being hired away by the casinos. Unemployment has fallen from 6.4% between May and July of 2003 to 4.2% between September and November of last year.

Still, no one is expecting the crowds of Chinese visitors at Macau’s ferry terminal to dissipate. Any shortage in labour can be satisfied by hiring from outside the territory. And after all, what government leader would not be grateful for nearly 50% growth; Macau’s days as a sleepy fishing town plagued by gang members are over, and its reign as Asia’s Las Vegas is just beginning.

Alexandra Harney is the South China correspondent for the Financial Times in Hong Kong.