Macau's Casinos May Take Another Hit From China

Gaming companies in Macau can't seem to catch a break these days. In 2014, a crackdown on corruption in Mainland China caused high rollers to stay home rather than gamble millions of dollars in Macau's casinos.

The result was the sharp decline in gaming revenue that you see below. Now, Macau's own government is reportedly proposing a cap on visitors from Mainland China, which could hurt revenue even more. It could be a punch in the gut, just as Macau's largest operators prepare to open billions of dollars of new casinos. But will things be as bad as they appear?

Data source: Macau Gaming Inspection and Coordination Bureau.

Macau wants what? Macau Business is reporting that Macau is proposing to China's government that the number of visitors from Mainland China be limited to 21 million or less per year. To put that in perspective, Macau's Statistics and Census Service said that the number of visitor arrivals last year grew 7.5%, to 31.5 million. The number of visitors from Mainland China grew 14.1%, to 21.3 million, as infrastructure between Mainland China and Macau improved, and more people in the middle class could afford to take the trip.

The newest hotel being built at Melco Crown's City of Dreams. Image source: Melco Crown.

A cap at last year's levels seems counterintuitive, but there's some strategy behind it. According to Macau Business, Macau wants to boost the number of VIPs, or high rollers, who spend more in each visit, and limit the number of mass-market players coming to the region. It would also like to boost the number of visitors coming from outside of Mainland China, which provides 65% of visitors.

In a way, seeking to improve the revenue from each visitor makes sense; but this cap proposal is also coming at a time when U.S. traded Las Vegas Sands , Melco Crown , MGM Resorts , and Wynn Resorts are all building new casinos to increase gaming and hotel capacity. Macau could be limiting demand just as supply is increasing.

In search of foreign gamblers The biggest driver could be something we've seen over and over in Asia -- the region wants more revenue from foreign gamblers than locals.

Macau is a special administrative region of China, so Mainland China's gamblers aren't exactly locals; but the Macau government may be trying to get ahead of China's concerns about increased gambling by Chinese residents. There can be a reputation for corruption, money laundering, and even mob ties in Macau, so telling the Chinese government to limit visitors could get out ahead of more restrictive caps they could put in place.

The desire to focus on foreign gamblers is something we've seen before in Singapore, where there's a fee for locals to enter the casino, and a concern that countries like Korea and Japan have grappled with when discussing new casinos.

Rendering of Wynn Palace on the Cotai Strip. Image source: Wynn Resorts.

There have also been limitationsfrom China in the past, like a limited number of visas to Macau, or limiting the number of times a person can go to Macau in a year. But capping the total number of visits would be a sweeping move that would turn the search to foreign gamblers, something every country is trying to do.

Is this a deal breaker for casinos? The timing couldn't be worse for gaming companies; but long term, this might not have the negative impact you would think. Twenty-one million visitors from Mainland China is still a lot, and would be in line with 2014's number.

This also could increase the amount of time the average visitor stays in Macau. For decades, Macau has been a day trip for gamblers; but as hotels and entertainment venues are built, they could be enticed to stay a few nights, much like people do in Las Vegas.

Moving to higher-revenue gamblers and foreigners could also create a more diverse and stable base of revenue long term. Macau is trying to become an entertainment hub for the world, attracting conferences, entertainers, and tourists the world over. With that vision in mind, a limit on visitors from Mainland China may not be as bad as you think.

A limit on visitors certainly isn't a good thing for Macau's casinos, but I also don't think it's as bad as it seems at first glance. The proposed restrictions aren't as bad as they appear, and Macau is already pivoting to a more global audience. This could just be another catalyst to force that change in the gaming industry.

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Travis Hoium owns shares of Wynn Resorts, Limited. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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