China casino crackdown doesn’t pose a ‘major challenge’

The chief executive of MGM Resorts International (MGM) brushed off concerns about a Chinese government crackdown crimping profits in the world’s largest gaming market of Macau, saying he doesn’t view it “as a major challenge.”

In an interview with Yahoo Finance, Bill Hornbuckle, CEO and president of MGM Resorts International and chairman of MGM China, dismissed concerns that China’s new regulatory attempts to exert tighter controls in the gambling enclave would fundamentally alter the growth opportunities in the market.

“Until proven wrong, I’m not and we’re not overreacting to what is being hyped or said,” Hornbuckle said. “We are hoping rational minds control in the end because this is the Macau economy.”

Macau has operated as the gaming capital of Asia for two decades, as the only jurisdiction under Chinese rule allowed to operate casinos. Revenues generated from the country’s high-rollers have become increasingly important to American casino operators like MGM, Wynn Resorts (WYNN), and Las Vegas Sands (LVS), with Macau’s casinos generating six times the revenue of casinos in Las Vegas, earning $360 billion in 2019, according to Bloomberg data.

So, when Macau’s Secretary for Economy and Finance announced last month that it would begin a review of the casino industry to tighten government oversight over operators, that sent stocks plummeting. Shares of Macau casino operators shed a third of its value, roughly $18 billion in one day.

This general view shows the interior of the MGM Cotai casino resort in Macau on February 13, 2018.
MGM China opened on February 13 its new multi-billion-dollar mega resort in Macau's glitzy Cotai strip on Tuesday following multiple delays and last minute hiccups in the government approval process. / AFP PHOTO / Anthony WALLACE        (Photo credit should read ANTHONY WALLACE/AFP via Getty Images)

This general view shows the interior of the MGM Cotai casino resort in Macau / AFP PHOTO / Anthony WALLACE (Photo credit should read ANTHONY WALLACE/AFP via Getty Images)

‘We’re all in good standing’

Hornbuckle said the Gaming Inspection and Coordination Bureau (DICJ) already maintains significant oversight over operators, and officials remain a constant presence at its two locations, MGM Macau and MGM Cotai. But recent regulatory actions taken against other industries, including video gaming and private tutoring companies, have raised fears the Chinese leadership is looking to exert greater state control over day-to-day operations, as President Xi Jinping preaches the need for “common prosperity,” prioritizing social obligations over profits.

The timing of the industry-wide review has rattled investors further, with local licenses up for review next year. Yet, Hornbuckle said he is optimistic that authorities will take a more pragmatic approach to regulation, given the contribution casinos make to Macau’s economy, where 80% of government revenue comes from the gaming industry,

“[Government oversight] is not that foreign to our industry in our business. Obviously, government oversight in China, implies something different, potentially,” he said, conceding that Chinese leadership is looking for greater ‘control and oversight.’

“[Local and national officials] recognize the value that it brings and ultimately the value that we’ve brought as operators to the greater community. I mean we do a lot in the community just beyond employment, which is a big piece of it, of course. So I, I think we’re all in good standing,” Hornbuckle said.

OSAKA, JAPAN - FEBRUARY 21:  Commercial buildings are seen over the Osaka Bay as container ship sails to container terminal near the Yumeshima Island on February 21, 2017, in Osaka, Japan. Osaka prefecture's political and business leaders announced their construction plan to develop the artificial island, Yumeshima Island or 'Island of Dreams' in the Osaka Bay as Japan's first large scale casino resorts including convention centers, hotels, shopping facilities and exhibition halls. According to the plan, the first area to be developed is approximately 70 of 390 hectares of the Yumeshima Island, which would be turned into the core of the integrated resort - casinos, hotels and exhibition halls. The estimated cost of construction and development is 824 billion Japanese yen (approx. 73 million USD.) The Japanese government passed the bill for the Integrated Resort (IR bill) to legalize casinos in the resort developments comprising hotels, entertainment, shopping, restaurants, and other tourist attractions, in the end of 2016.  (Photo by Buddhika Weerasinghe/Getty Images)

Commercial buildings are seen over the Osaka Bay as container ship sails to container terminal near the Yumeshima Island. (Photo by Buddhika Weerasinghe/Getty Images)

Diversifying beyond China

MGM is already looking beyond Macau, to make up for any drag on business that may come from tighter government controls.

Last week, the firm took a big step towards realizing its ambitions in Japan, when the city and prefecture of Osaka selected MGM and its joint venture partner Orix to be the region’s integrated resort partner. The selection marked a big victory for a years-long lobbying effort, accelerated after the Japanese parliament passed a bill legalizing casino gambling for the first time in 2018.

MGM has already proposed a $10 billion investment to build out an integrated resort, complete with 2,500 guest rooms and 400,000 square feet of conference facilities. Hornbuckle said, the revenue potential is “considerable.”

“The Osaka and Kansai region itself has 19 million people who live there. If you have the sole license to be able to do this activity in this case for 19 million people, it’s pretty compelling” he said. “In Southern California, which is 30% of our market base [in Las Vegas] we have over 100 licensees. Think about that.”

Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita

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