MACAU — Macau’s newest gambling palace has plenty to beckon deep-pocketed Chinese visitors looking for a good time.
The $3.2 billion hotel complex, Studio City, includes the usual collection of restaurants, bars and luxury watch and clothing shops. It offers family-friendly attractions like a Batman-themed flight simulator and a play area with rides based on Warner Bros. cartoon and comic book characters. It even features a Ferris wheel in the shape of a figure eight built into the Art Deco hotel facade — part of an overall effect the developer calls “Gotham City with asteroids shot through.”
There is one attraction, though, it is short of: gambling tables.
A few weeks before it opened in October, the local government announced that the casino would initially be permitted only 200 tables — half the number that Studio City’s owners had planned. The decision undermined the developers’ financial assumptions, forcing them to negotiate a waiver from their creditors on requirements for the casino’s size.
The local government started regulating the number of casino tables years ago to temper growth when the Macau market was booming. But the policy is now forcing a broad recalculation for casino operators, as this former Portuguese colony has been dealt a challenging hand.
As gambling revenue has dropped over the last year, Macau’s casino developers have been making a huge bet on mass-market tourism, with big investments in hotel rooms, retail space, shows and family-oriented attractions.
These projects received financing and started construction a few years ago, when Macau was still growing fast. Including Studio City, developers are collectively spending about $20 billion on a wave of mammoth resorts scheduled to open in the next year or two on the Cotai Strip, a stretch of reclaimed land that has become the city’s main casino district.
The challenge is that the developers are counting on gambling revenue to initially offset those investments. And the number of tables is crucial in Macau. Casinos here rely on table games for 95 percent of their gambling revenue, compared with roughly 50 percent in Las Vegas, where slots play a big role.
Studio City will not only be short of the tables it had planned, but it will also be the first casino in more than a decade without any private gambling rooms for high rollers — making the stakes even higher for that flight simulator and Ferris wheel to attract guests.
“Studio City is going to be the absolute litmus test for the mass market,” said Ben Lee, the managing partner at IGamiX Management and Consulting, which focuses on the gambling industry.
Macau, a special administrative region like Hong Kong, is the only place in China where casinos are legal, and the business has grown at an astounding pace since the government ended the four-decade gambling monopoly of the Hong Kong billionaire Stanley Ho in 2001.
But after peaking early last year at almost $5 billion, monthly casino revenue has fallen by roughly half, to levels last seen five years ago. China’s bruising crackdown on official corruption has scared away big gamblers of all stripes, but other factors, including the adverse effect of local government policy, have weighed on the bottom line, too.
“Even the Macau government thought for a while that the gaming industry is bulletproof, that you can take a machine gun or a bazooka and shoot it, and it’s going to keep growing,” said Lawrence Ho, the chief executive of Melco Crown Entertainment, Studio City’s lead developer.
Mr. Ho is one of 17 children (with four women) of Stanley Ho, now 94 and ailing. One of Stanley Ho’s older children, Pansy, is the co-chairwoman of MGM China and owns 27 percent of the company, a joint venture controlled by the Las Vegas casino firm. But the siblings are confronted by different and perhaps more daunting challenges than their father faced.
Gone are the days of the late 1990s, when triad gang members, engaged in turf wars, gunned down Portuguese officials and one another. Instead, the fiercest battles are being waged on the Cotai Strip, where the city’s six casino operators — including local units of Las Vegas companies controlled by Sheldon Adelson and Stephen A. Wynn, as well as MGM — vie to complete the newest, biggest hotel even as the economy falters.
One recent setback for these developers has been a brutal rout of the junket industry, the result of a corruption crackdown and slowing growth in China. Junket operators, both individuals and companies, are the middlemen who bring big gamblers from the mainland to Macau’s casinos, extend them credit and collect debts.
Unlike those in Las Vegas, casinos in Macau do not lend much to players from China because mainland courts don’t recognize gambling debts. Instead they turn to the loosely regulated junket operators, who sometimes have murky backgrounds and unclear sources of funding.
And the effects of the anticorruption drive have been compounded by the broader economic slowdown nationwide. From a peak of around $30 billion in gambling revenue in 2013, revenue from high rollers at Macau’s casinos has fallen more than 50 percent.
Players have been defaulting on loans from junkets or taking longer to repay. Fraud has also been an issue.
In September, one large junket operator at the Wynn Macau casino, the Dore Group, announced that its financial manager had absconded with funds. The police have so far received 50 complaints from residents of Macau, the mainland and Hong Kong who claim to have lost a total of 530 million Macau patacas, or about $65 million, in the incident.
“The adjustments taking place in China’s economy are shedding light on business disputes and debt problems that built up within Macau’s gaming industry,” said Charlie Choi, a former investor in the junket sector, who is the president of the newly established Macau Gaming Information Association.
“One of the main reasons for this is that the law is seriously lagging when it comes to the enforcement of gambling debt,” he added, “and a lot of people aren’t repaying the money they owe.”
The squeeze on their biggest customers has radically changed the environment for casino operators and made the local operating restrictions, including table limits, more keenly felt.
Lawrence Ho said Studio City’s decision to do away with private gambling rooms and their V.I.P. tables was, in part, forced by receiving permission to operate only 200 tables, with the ability to add 50 tables early next year.
He and his co-investors in the Studio City project, the American private equity companies Oaktree Capital Management and Silver Point Capital, risked violating a clause in their $1.4 billion loan agreement. But Melco Crown Entertainment announced in mid-November that creditors had signed off on the reduced table count at the casino.
Mr. Wynn, the chairman of Wynn Resorts, has been outspoken in his criticism of the local government’s table limits.
The reason that the extraordinary nongambling attractions exist, he said in a conference call with investors last month, is that the casino “is the cash register.”
“Here in America, we would never have a Las Vegas of the diversity we’ve had if the city had told us how many tables we could spread,” Mr. Wynn added. “The table cap is the single most counterintuitive and irrational decision that was ever made.”
In a statement last month, Lionel Leong, the Macau economy and finance secretary, replied that “a moderate control of the pace of development for the gaming sector” had “the consensual support of Macau society.”
The array of challenges has forced operators to be resourceful in seeking to lower their operating costs.
There is huge political opposition in Macau to layoffs of local residents, as casinos and hotels directly employ over 100,000 people, or a quarter of the work force. So gambling companies have been cutting migrant workers, while keeping thousands of local employees on their payrolls until they can be transferred to the new properties opening on the Cotai Strip.
Another challenge has been a ban on smoking inside the casinos. Industry executives estimate that a majority of gambling patrons are smokers. The local government earlier this year proposed a full ban on smoking inside casinos, a move that has led to a falloff in gambling revenue in other jurisdictions.
But the industry has pushed back, proposing instead to allow smoking only in designated rooms inside the casino floor. Talks with the government are continuing.
With Macau’s economy now in deep recession and the cash-rich government facing the rare prospect of budget cuts, Mr. Ho detects signs that local officials are likely to reconsider their hard line on the table limits and smoking. “I think now they are realizing, ‘Wait a minute, we need to support the industry as well,’” he said.
What is clear is that Macau’s once-seemingly inexorable rise, driven by big-spending mainland gamblers, commonly referred to as V.I.P.s, is over.
“It’s a paradigm shift,” said Vitaly Umansky, a gambling analyst at Sanford C. Bernstein in Hong Kong. “Everyone realizes that the V.I.P. business has gone through a structural decline, and it’s not coming back, and it’s definitely not coming back to the way it was before.”
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