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All Eyes on China

The most sought-after gambler in Asia is Chinese. But how do you get your message out in a country where gambling—and marketing gambling—is illegal?

All Eyes on China

It doesn’t take much market analysis to determine that the Chinese high roller is the most sought-after customer in East Asia, and the rest of the casino gaming universe more broadly.

These players have made it rain over the last decade in Macau, Las Vegas, Singapore and the other jurisdictions that have aggressively marketed to them, dropping not only eye-popping baccarat volumes but also racking up spend on high-end shopping and other non-gaming amenities at properties in these jurisdictions.

“The Chinese market is by far the single largest market for any casino in the world,” says Ben Lee, managing partner of Macau-based iGamix Management & Consulting. “The only criteria for success are travel time and connectivity.”

Major Market

As China has emerged as a massive, yet largely untapped customer base over the past 15 years, casinos and integrated resorts have sprouted up across East Asia in places such as Australia, Cambodia, South Korea—even as far flung as Saipan—with the goal of luring Chinese clients of all market segments.

“China is such a significant player from a feeder market perspective that a lot of the jurisdictions in the surrounding regions to a large extent rely a lot on China, especially in the VIP and premium play segments,” says Michael Zhu, vice president of operations planning and analytics at The Innovation Group.

Further, an entire sub-industry of junket operators has emerged for the purpose of recruiting VIP players, extending them credit and then getting them inside the doors of the region’s casinos.

But given the disproportionate weight that China carries as the engine driving the casino economy in East Asia, it’s true that when the China outbound tourism market sneezes, to borrow from the old axiom, its benefactors catch a cold. Any action or trend, no matter how seemingly trivial, can have ripple effects throughout the region that are difficult, if not impossible, to quantify.

As such, reading the tea leaves of China’s secretive political climate, regulatory environment and, most importantly, the ebbs and flows of its VIP player base and then reacting accordingly is an existential balancing act that has no simple approach: too much distance, and the competition will scoop up those lucrative players; too close, and you might find your employees being arrested.

The biggest sneeze occurred in 2014 when the Chinese Communist Party launched one of the stingiest anti-corruption crackdowns in its history, curbing the flow of high-end players traveling to Macau—a sub-autonomous Chinese territory located just west of Hong Kong and the only place in the nation where gambling is legal—and sending the city’s gaming revenue plummeting from the tune of $45 billion in 2013 to just $29 billion in 2015.

While the crackdown prompted many Chinese players to simply stay home, others seeking to try their luck elsewhere found no shortage of new destinations more than happy to take them in.

Fast-forward to 2017, where Macau has enjoyed more than a year’s worth of monthly growth in gross gaming revenues on the heels of new VIP-oriented properties opening in the territory.

While the worst seems to be over, the incident paints a vivid picture of the inherent risks, rewards and uncertainties that casino operators face when banking on the Chinese gambler.

“If I was a country banking on Chinese to come and gamble I wouldn’t feel comfortable right now,” says Grant Govertsen, a Macau-based analyst with Union Gaming.

Understanding the Crackdown

Gauging the chances of another gambling slowdown fueled by Chinese government policy requires grasping the nature and motivations behind the current anti-corruption crackdown, as well as the opaque manner in which such policies are formulated and rolled out.

Admittedly, this is far from an easy task.

“We try to keep our ear to the ground as best we can, but regulatory risk has always been inherent in gaming in Macau,” says David Katz, an equities analyst with the Telsey Group. “It goes through periods of time where that risk adjustment is less and in some cases it’s more, but it certainly far exceeds anything else in my coverage universe in gaming or hospitality.”

For foreigners, the secretive nature of the Chinese Communist Party and its governing style—a stark divergence from what’s typical in liberal, Western democracies—can be difficult, if not impossible, to grasp.

On October 18, the Party’s Congress, which convenes every five years, will deliver a second term to President Xi Jingping—the man behind the crackdown that sent the Asian gaming business into a tailspin—and allow him a consolidation of power.

While the anti-corruption campaign has not necessarily let up, it has taken on a different form, shifting more towards the banking and finance sectors, explains Richard McGregor, a former bureau chief for the Financial Times in China and author of The Party: The Secret World of China’s Communist Rulers.

“The campaign has been the most intensive internal party anti-corruption campaign since 1949, so it’s a big deal,” he says. “Most people would have thought it would have finished by now, but there are still big people being knocked off.”

In addition to targeting corrupt officials who were using Macau as a base to launder money, the introduction of capital controls and a crackdown on money leaving the country to counteract an overheating currency have also curbed the flow of clean money to Macau and elsewhere.

McGregor, who has recently released a new book on the geopolitical interplay among China, Japan and the United States, also suggests that the secretive yet sometimes whimsical nature of Chinese policy-making played a role in targeting the once-sizzling gaming economy.

“There were probably some elements of the Chinese government that thought Macau was growing too quickly. Maybe people like Adelson and the like were getting rich too quickly,” he says.

Where Did the VIPs Go?

But thwarting Chinese VIPs from visiting overseas casinos to gamble quickly became a game of cat-and-mouse.

“The VIP players started migrating to other jurisdictions like Vegas,” says Lee, noting that southern Nevada benefitted handsomely in the form of boosts in baccarat volumes during the initial 12-18 months following the onset of the campaign.

But the joy was short lived.

“What happened then was that Chinese undercover agents started following people to Vegas,” Lee says.

Perturbed players once again began to look elsewhere. It wasn’t uncommon to hear of Chinese players traveling to obscure places like Lake Tahoe to avoid being tracked. Soon enough, they began venturing to Australia and Singapore, with undercover agents again in tow.

But in August 2016, the opening of several new VIP-oriented properties—including Wynn Palace, the Parisian and new VIP rooms at Studio City—gave players a motive to try Macau once more. As they did, they discovered no signs of significant interference by Chinese authorities, though certain nanny-state technologies like facial recognition at Macau ATM machines have been rolled out to keep tabs on players.

Equal and Opposite Reaction

While that’s good news for companies with operations in Macau, not everyone is happy about the return of the Chinese high-roller diaspora to Macau. Jurisdictions like Australia, New Zealand and Singapore have seen significant hits to their VIP play.

Crown Resorts, the Australian casino operator led by James Packer, saw VIP gambling volumes decline year-over-year by nearly half, and total profits plummet by 15.5 percent in the 12 months leading up to June 30. Sky City, the New Zealand-based operator, saw VIP volumes decline by 30 percent during the same period.

The true body blow came last fall with the arrest of 19 Crown employees for illegally marketing gambling on the Chinese mainland, sending shockwaves through the industry and effectively neutering the company’s ability to draw VIP players from China.

While the Chinese government issued a strong warning in March 2016 telling foreign operators not to market inside its territory, it’s generally understood that all of the major concessionaires in Macau continue to engage in marketing on the Chinese mainland.

Thus, there is only speculation as to why Crown—which holds just a partial stake in one Macau license—was singled out for engaging in the activity while others were left alone.

“China is a black box… Why is it that only Crown was targeted? Was it something company-specific? Can that somehow be tied to Crown’s departure from Macau? We’ll never know,” says Govertsen.

Theories of what that motive might be span a wide spectrum. Some suggest they were sending a message to the Australian government; others say they were trying to punish Crown for cooperating with an investigation of a Chinese high-roller in another jurisdiction; others reckoned the Chinese were simply trying to reroute gambling activity back into their purview.

“When they were clamping down on the Crown marketing people and other countries, it was really intended to force that business back into Macau where they could keep an eye on it, where it could be properly regulated,” says Katz. “It keeps the VIP business in their backyard rather than running around in the wild.”

Others reckoned that the level of ostentation and audacity in Crown’s marketing tactics may have crossed a threshold.

“The Crown arrests were not surprising. What was surprising was they believed they were immune from the warnings that China started issuing to all foreign casinos,” explains Lee.

A common tactic to circumnavigate the ban is to engage in marketing activity under the auspices of promoting a resort property rather than gambling specifically. This was not the case, Lee reckons, in Crown’s case. “It would have not taken much for anybody sitting in on the conversations to realize that they were, in fact, promoting gambling.”

Room to Grow

While there’s certainly no insignificant risk in marketing to Chinese customers, there’s also no shortage of potential reward.

The Chinese VIP market hasn’t just recalibrated; it has continued to grow, explains Zhu.

“I think it’s still growing; maybe not as rapidly as, say, in 2013 or 2014, but it’s still growing,” he says, referencing notable improvements in China’s real estate market and other macroeconomic indicators. “Six months ago, people were a little more concerned about a possible slowing down of China’s economy.”

China also remains a largely untapped gaming market. Only an estimated 2 percent of the country’s gaming market potential has been thus far penetrated, explains Lee, and 80 percent of all visitors to Macau from the mainland come from neighboring Guangdong province.

“Penetration of China is actually very, very low,” he says. “Macau is only servicing a very small part of China. We have barely scratched the surface.”

And despite the institution of programs designed to limit players’ gaming spend abroad, Chinese outbound tourism on the whole is rapidly increasing, with 122 million outbound trips in 2016—up from 107 million in 2014, according to the Chinese National Tourism Administration. Further, total consumption by Chinese tourists overseas was $110 billion in 2016.

Obviously, these tourists are spending money on other items aside from gambling, but the overall impact is still significant.

“Gaming may not be even close to the majority of their spend, but if you take into consideration the huge base and the scale, that spend or that volume is still a pretty significant amount,” says Zhu.

New Capital Outflow Controls

In late August, the Chinese government again raised industry eyebrows by issuing an order prohibiting mainland Chinese companies from investing in overseas projects having to do with gambling and a variety of other leisure industries.

On the surface, this order seems to affirm the perception that the Chinese government is seeking to corral gamblers back into Macau.

“Not only do they prefer the players to come back to Macau to play, they are making sure that Chinese companies are not investing in competition elsewhere outside of Macau,” says Lee.

But McGregor suggests that the investment restrictions may just be another instance where gambling is simply caught in a crossfire between competing poles of influence within the Chinese government.

While there has been a surge in Chinese overseas investment recently, the party is not pleased with the terms of many such deals, and is concerned that many of them are simply ruses for moving money around outside of the country.

“Some of it’s crazy stuff—people overpaying for European soccer teams and everything like that,” McGregor says. “There’s a few things going there, but it’s a serious campaign; it’s not one of these pithy little edicts. It’s a real directive and you’ve seen real things happen as a result of it.”

“The Chinese don’t want to do what the Japanese did in the 1980s and just waste all this money on dumb overseas deals,” he continues, adding that there is suspicion that Chinese entrepreneurs are deliberately overpaying for assets overseas to get money offshore.

Japan Conundrum

While the Chinese feeder market is certainly large enough to lift all neighboring boats, recent history tells us that there is no guarantee that the Chinese government won’t, on a whim, cut off the flow of travel to a particular country if it deems a move to be in the national interest.

South Korea is a case-in-point example, as China has recently throttled the flow of tourists in response to the country’s deployment of the THAAD missile defense system—sourced from the U.S.—to wield against potential North Korean aggression.

The result has been a monumental slowdown in VIP gambling numbers, with Paradise’s gambling volume from Chinese VIPs dropping 27 percent year-over-year in the second quarter of 2017.

Japan is the newest Asian nation looking to legalizing casinos of its own, but discussions are tightly focused on marketing to locals, as the interested foreign operators have made this a prerequisite to their coming to invest billions of dollars building new integrated resorts in the island nation.

“Japan’s gross gaming revenue story will be primarily local Japanese, so they won’t have much to worry about from a political risk perspective as it relates to GGR,” says Govertsen.

Why not try to attract the Chinese? After all, Tokyo is just a three-hour flight from mainland China.

Lee reckons that the emphasis on the local market is necessary at this point to avoid prodding any sleeping giants in Beijing, who likely will not be keen to the Japanese targeting Chinese VIP clients.

“I believe that China has given a very quiet warning to Japan that if they were to ever target mainland Chinese as their primary customers, China would basically clamp the flow of Chinese tourism to Japan as they did to South Korea,” he says.

However, Japanese politicians have discovered that there isn’t much enthusiasm among the population to build the casinos, and as a result, measures such as entry taxes have been proposed as a means of trying to keep the locals out of the properties.

“The locals are saying to the foreign operators: ‘Yeah, we want your investment, but we have huge problems with gaming issues and we don’t really want to sacrifice our locals to your international ambitions,” Lee explains.

“Without the Chinese market, the only thing that would attract the operators are the locals. Without the locals and without the Chinese, there is no market.”

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