Sunday, December 27, 2009

Betting on Macau: tax, sex and casinos - 21st December 2009

Shielding his eyes from the midday glare, Lawrence Ho carefully removes his shoes and socks. Hitching suit trousers higher and leaving his two granite-faced bodyguards, the young tycoon steps out on to the beach. Bare feet crunch in the white sand as he makes for a deckchair.

"Before I built this, they told me that Chinese people don't like swimming pools," he says, gesturing back towards a twinkling, azure-tiled pool with a Chinese couple splashing around in it. "But that's not true. They told me Chinese people don't like the sun. I mean ... come on, that's not true, either."

A few moments later, his toes satisfactorily wiggled into the sand, Mr Ho's stint of leisure is finished: he must now attend to the infinitely more important business of leisure. There are 300 million people living immediately over the border in mainland China and, at some point over the next few years, he reckons, they will want to come to Macau for a good time. The question is whether they will come for the pool as well as the baccarat.

The thick-necked heavies approach Mr Ho with fluffy white towels, relieved that he is off the deckchair and back under their jurisdiction. The beach, needless to say, is fake -- a five-star whim built at eye-watering expense atop Macau's ritziest complex, the City of Dreams. Not far beneath Mr Ho's feet is what he hopes will finance the rooftop folly: a brand new casino and the unshakable Chinese appetite for gambling. Does he fancy joining me downstairs for a flutter on the tables? "I don't gamble," the 32-year-old gaming kingpin says with a straight face, "because I know the odds."

So, too, do most of Mr Ho's guests, though that does not seem to stop them wagering millions on the turn of a card. "The Chinese people are some of the smartest at maths in the world, but they stop believing in it when they come here," Mr Ho says. "They come through the door of a casino (and) all that maths vanishes."

That willing amnesia, and the culture of superstition that infuses Chinese gambling, are directly shaping the business strategy of Melco Crown, the gaming empire jointly founded by Mr Ho and James Packer, of the Australian media dynasty.

On Macau's casino floors, comfortably the most popular game is baccarat. A huge weight of tradition accompanies the way in which the player turns the final card -- more often than not it is bent in half for good luck. The casino (and every other one in town) throws away a whole pack of cards after every game. Cards are a pretty significant running cost. Mr Ho says with a sigh: "The Chinese really like to destroy them, because they think it will change their luck."

But where superstition is involved, the wise man does not complain but panders. "Our goal is to provide fun and excitement and an atmosphere where guests feel excited but also -- and this is important -- to make them feel lucky. Auspiciousness is very important in this part of the world," he says, justifying the way that the City of Dreams has begun morphing its decor and campaigns.

The shows, for example, have been given a "lucky" dragon flavour. The water theme that pervades the complex, he says, is critical. Unlike foreign operators such as Wynn and Las Vegas Sands, which have arrived in Macau with "cookie cutter" versions of US casinos, Mr Ho believes that his is more directly playing to the Asian gallery. He says: "Water is one of those feng shui auspicious things in Chinese culture."

Mr Ho's ability to read Chinese gambling culture should not really come as any surprise. He is, after all, the eldest son of Stanley Ho -- the colourful 87-year-old gaming patriarch who controlled Macau's casino monopoly for 40 years until it was broken up in 2002. Even now, with that monopoly unbundled and operators such as Lawrence allowed to compete with the old man, Stanley Ho's company retains a 30 per cent share of Macau's $US14 billion ($15.75bn) annual gaming revenues.

Are Ho family gatherings the competitive infernos suggested in the local press? Mr Ho is cautious: "Every single big family has its own disagreements. When we all sit down together we talk about business ... less. When I sit with my father it is more like father and son than two competitors trying to chew each other's heads off."

Since the northern hemisphere summer, the future of Sociedade de Jogos de Macau (SJM), the former gaming monopoly, has been the subject of much speculation. In July, Stanley Ho apparently fell and incurred substantial injuries. He has remained in hospital since then, visited only by his close family, a clan that comprises 17 children. Some believe that they will fight tooth and nail for control of SJM, should the old tycoon's health deteriorate.

Yesterday, to widespread surprise, Mr Ho appeared in public, frail, pushed in a wheelchair, but unequivocally alive. Many will read much into who was pushing the wheelchair, but the patriarch's presence was significant in itself. Macau's gaming industry has flourished because it has, with a few wrinkles, pleased Beijing. Stanley Ho is believed to have played a critical role in maintaining those good relations.

Yesterday marked the tenth anniversary of the handover of Macau from Portuguese to Chinese control, and Hu Jintao, the Chinese President, flew in from Beijing to oversee the event. It included the official inauguration of Fernando Chui, Macau's new chief executive and a great ally of Stanley Ho.

But even if the influence of its patriarch wanes, Macau stands on the brink of another phase of blistering change. The past decade of Chinese rule has seen economic progress at a clip few imagined possible and operators such as the younger Mr Ho believe that people should get used to the pace. Certainly, Macau's growth will be regulated at the pleasure of Beijing, and it has more than enough tools to cool things down if it chooses. But for the moment, at least, China wants Macau to succeed as a Special Administrative Region like Hong Kong: it stands as proof that the "one country, two systems" structure works.

"Remember, too, that the biggest shareholder in Macau's gaming industry is the government, with its tax rate of 40 per cent," Mr Ho says.

The city has overtaken Las Vegas as the gambling capital of the world. Macau's ability to defy the global slump fulfils a prediction made by Mr Ho this time last year that was roundly derided by many. "My bold and idiotic prediction of growth has come true," he says.

Five days ago, ground was broken on a new bridge that will connect Macau to Hong Kong and shorten the journey time from one hour by sea to only 20 minutes. Next year work will begin on a light railway that will improve significantly the flow of people around the city.

"Macau's biggest constraint right now is infrastructure. We get about 30 million people per year. These 30 million people are arriving into an infrastructure that was exactly the same when the visitor numbers were 10 million, so there is a major stretch in the market ... there haven't even been new taxi licences for ten years. The bridge will be a major transformational event," Mr Ho says, waving his arm out at the dilapidated ferry terminal and congested roads.

The private sector, particularly the integrated resort operators, such as Melco Crown, believe they have a starring role in the new Macau story. It is young chief executives such as Mr Ho, with his plans for a children's area, nightclubs and more shows, who hope to convert Macau from a sleazy den of hardcore gamblers to a mass-market leisure destination. The process will be gradual. Macau's casinos still make 80 per cent of their revenues from VIP customers who neither play on the main floors nor stay especially long.

For all of the billions that have been invested in places such as the City of Dreams and the Venetian across the road, the average visitor to Macau stays only 1.5 nights -- a figure that contrasts unflatteringly with the 3.5 average of Las Vegas. The unyieldingly static nature of that number would seem to be a poor argument for building a resort with 1400 luxury hotel rooms.

"No. Macau has a great potential to be a multistay market. The problem with Macau was supply constraints," he says, railing against the shoddy, overpriced rooms that visitors used to be forced into. "For Macau to take the next step, it must have more non-gaming revenue. There are people who go to Vegas who never go to a casino. In order for Macau to go there, it is really going to be supply driven, so we need more rooms."

Does that mean that Macau can afford to lose its vigorous sex industry and the sordid glamour that many see as part of the city's charms? "No," Mr Ho says, "it comes hand in hand. On one hand we do want to create more of a family-type atmosphere. But inevitably ... there is going to be an adult-related component." Equally, Macau's casinos may find it hard to shed the influence of the so-called junket operators: agents who bring in the high rollers, extend them lines of credit and take a healthy commission. Many view the operators as sitting somewhere between legitimate travel agents and vicious loan sharks.

Over time, Mr Ho says, that system will change -- it may already have started. The trick is not to allow the pace of growth in Macau to be confused with more fundamental change. For casinos such as the City of Dreams, the junkets provide a useful service.

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