The risk that one of Macau’s gaming concessions or sub-concessions could be redeemed early by the territory’s government has been rather overlooked as a market risk, says a new report from Daiwa Securities Group Inc.
It adds that the possibility of an operator being taken out of the market early because of non-fulfilment of its government contract cannot be ruled out either.
“It is widely believed that concessions/sub-concessions will last until 2020 for SJM [Holdings Ltd] and MGM [China Holdings Ltd] and 2022 for Wynn [Macau Ltd], Melco [Crown Entertainment Ltd], Galaxy [Entertainment Group Ltd] and Sands [China Ltd]. However, many have overlooked critical terms on the licensing contracts that state that the Macau government can redeem concessions prematurely,” said Daiwa analysts Jamie Soo, Adrian Chan and Jennifer Wu in a report on Friday, referring in that case to a ‘no fault’ basis for redemption.
“Beginning on 26 June 2017 (April 2009 for SJM/[MGM]), the Macau government has the right to redeem the concession by giving one year’s notice, in which event the concessionaire would be compensated based on the previous year’s EBITDA [earnings before interest, taxation, depreciation and amortisation] multiplied by the number of years remaining on the concession,” they added.
The other possibility – termination on the grounds of non-fulfilment of contract – could happen in theory for a range of reasons including: failure to complete – at dates agreed with the government – construction projects specified in the investment plan; and non-compliance with Macau laws, regulations and/or the instructions of the local casino regulator the Gaming Inspection and Coordination Bureau regarding anti-money laundering procedures and for combatting the financing of terrorism.
Daiwa said that according to the current contracts, up to six months prior to the expiry date, a concession contract may be extended by the Macau government for two additional years at a time, up to a limit of 20 years, and may be exceptionally extended for five years. But Daiwa notes that isn’t set in stone. “The Macau government does have the right to impose new renewal conditions,” stated the brokerage.
“It would perhaps be presumptuous to assume that successful licence renewals by the six gaming concessions is a forgone conclusion. In our view, a scenario whereby one operator loses its licence has not yet been discounted into sector share prices,” it added.
The Macau government is currently undergoing what it refers to as a “mid-term review of the current gaming operators to check their performance against their promises and against the government’s expectations. The administration has however indicated the review is not directly linked to the issue of Macau’s current operators being allowed to stay on in the market after current permissions expire.
A date for the conclusion of the mid-term review has not so far been publicly announced.
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"I am not going to speculate on what the [casino licence refreshment] tender requirements would be. I have full confidence and faith in the Macau government to treat everyone fairly"
Wilfred Wong Ying Wai
President and chief operating officer of Macau-based casino operator Sands China