Macau's Casino Recovery Was Just Dealt a Body Blow

By Markets Fool.com

Macau tourismgot a nice bump from the Chinese national holiday that kicked off October, raising hopes that the two-month streak in higher casino gambling revenues would continue for a third straight month, but the arrest of 18 Crown Resorts (NASDAQOTH: CWLDY)employees suggests the good times may quickly come to an end.

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Image source: Getty Images.

The enemy of my enemy

On the surface it seems Macau shouldn't be affected by the arrests, and could actually be helped, as these were employees of a competitor trying to siphon away customers from local casinoswho ran afoul of laws on marketing to high-stakes gamblers.

The authorities allege the detained employees committed "gambling crimes" by trying to lure gamblers to Crown's casinos in Australia and elsewhere by discussing gambling. While its standard practice for junket operators to entice VIP gamblers with promises of perks, amenities, and benefits for frequenting a specified resort, it's actually not permissible to mention gambling when doing so while on the mainland.

Since the gambling enclave has only just managed to reverse a two-year decline in gambling revenues with back-to-back monthly increases, a crackdown on the competition might be welcome.

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Shunning the spotlight

Besides, China's wealthy gamblers don't want to be the center of attention.Although Macau is the only place in China where it's legal to gamble, it's not really encouraged by the communist government. Wealth and excess are tolerated is more like it, and Beijing's crackdown on corruption, luxury, and elite gift-giving that ensnared several junket operators caused the high rollers to search for other venues out of the spotlight where they could lay their bets. Casinos in Australia, Malaysia, the Philippines, and Singapore have all reported a booming business, while Macau has gone wanting.

The notoriety these latest arrests bring is something the VIPs would very much rather avoid, and so instead of being a help to Macau's casinos, the gamblers may choose to lie low once more, causing the nascent recovery to turn south.

It was only in August the enclave's 26-monthlosing streakwas snapped when Wynn Resorts (NASDAQ: WYNN) opened its new Palace resort. Gambling revenues for the month rose 1% from the year-ago period, and though it was a modest gain, it was one that showed Macau's new focus on mass-market entertainment just might have potential. Because in addition to the corruptioncrackdown, Macau was also under orders to turn the region into aLas Vegas-style retreat where families from the mainland as well as high rollers could travel for entertainment.

Family fun for everyone

Melco Crown Entertainment's(NASDAQ: MPEL)Studio City featured theme park-like rides, including a Batman roller coaster and a figure-eight Ferris wheel. Wynn's Palace didn't quite go that route, but it did offer luxury retail shopping, a lake with "dancing water" performances, and a gondola ride that gave views of the city.

Image source: Getty Images.

When Las Vegas Sands (NYSE: LVS)repeated the feat after opening its Parisian casino in September, helping Macau's gambling revenues to jump 7% for the month, it seemed as though a trend might be developing.

Yet the industry faceschallenges nonetheless.The most notable feature missing from the new casinos is gambling tables catering to VIPs. Gambling authorities have imposed a 3% annual growth cap on the number of new VIP tables that are allowed so that when Studio City opened and Galaxy Entertainmentexpanded its Galaxy Macau resort, they were only given 250 tables each to assign to the high rollers. Wynn and Sands received just 100 a piece, with 25 more to come in 2017 and 2018.

While the casino operators are free to shuffle tables in from existing venues, and Wynnmoved 250 tables from its Wynn Macau resort to the Palace, it suggests the casinos might not be able to live up to their full potential.

Rubbing elbows with the unwashed masses

Still, October got off to a big start, indicating that gamblers, both VIP and mass-market alike, were flocking to Macau to see what all the hype and non-gambling entertainmentwas about. The Macau Government Tourist Office estimated some 770,000 tourists arrived on the peninsula the first week of October, a nearly 20% increase from the year ago period, and a sign the recovery mighthave staying power.

Which is why the arrests of the Crown Resorts employees are an unwelcome distraction. The allegations may cast a pall over the celebration as it puts the casinos, their VIPclientele, and the practices they use to lure them there back in the limelight.

The extraordinary wealth of some Chinese mainlanders has never set well with the ruling party in Beijing, and the flow of money into Macau has always been a touchy subject. Arresting junket operator employees, regardless of whether they're connected to foreign or domestic resorts, only brings unwanted attention upon the gamblers and their wealth.

Rather than remaining on center stage, the high rollers may instead choose to lay low, and that would deliver a gut-punch to Macau's renaissance.

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