China looking to reset the gaming landscape in Macau: casino industry expert

Ben Lee, IGamiX Managing Partner, joins Yahoo Finance Live to discuss the latest regulatory concerns facing the Macau gaming industry, sending casino shares lower.

Video transcript

- Casino stocks such as Las Vegas Sands and Wynn remain under significant pressure on fears of tighter regulation by the Chinese government. Las Vegas Sands alone has lost nearly $5 billion in market value. So far this week according to Yahoo Finance Plus data. So what's next? Ben Lee is a managing partner at IGamiX and is based in Macau. Ben, good to see you. Good evening to you over there in Macau. Look, I think a lot of investors were blindsided by this news this week, despite all of these casino companies warning about China government risk in their annual reports. My question to you is, what's likely to happen next?

BEN LEE: Good evening, Brian. So basically, now that we've got the new concession tendering process underway-- and I must stress that is not a renewal. It's actually a new process. This consultation phase essentially triggers basically the process by which we will then put in place the new legislation for the new concessions. They will then award the tender and technically it is viable and feasible that we may see the outcome of the new concession tendering process done before the middle of next year, before the expiry of the existing concessions.

- Ben, this is Emily. Thanks so much for joining us on this. And I'm wondering, assuming that this new concession tendering process actually does get approved and moves ahead next year following this public consultation period, if you're an investor in a Las Vegas Sands or a Wynn based here in the US, what does this mean on just a sort of practical basis for your investment in these companies with operations in Macau?

BEN LEE: So for a long time I believe most of the investors were lulled into a false sense of security in that they were led to believe that being American stocks they are-- being American operators, they are untouchable and that because they've had such an outsized presence in Macau that, you know, their removal or ejection may result in massive destruction. But the decision we believe here in Macau is that the decision is not with Macau partners, but essentially up North in Beijing. And the drivers for this particular outcome is more than just the local impact. It is a geopolitical issue.

Now, the relationship between China and the US, as we know, have deteriorated into quite a fractious one over the last four to five years and. The concession tendering process was actually supposed to have started about two years ago. But it was put in abeyance. And we have had no information about what's going on. And I believe that it was possibly due to the fact that Beijing wanted to see the outcome of the last election. They may have thought that the relationships would have improved with the US. But it is what it is. Things have not really improved. And I think the decision has finally been made not to keep this issue in postponement anymore, but actually to trigger it and let it run its course.

- Ben, is there one casino, out of those ones we just showed on screen, is there one that is better positioned to survive this and come out the other side?

BEN LEE: You would have to look at the local players versus the foreign operators. So the original concessions were granted, there were only three concessions, out of which the Americans, the foreign operators, only obtain one, which was Wynn. Now, that was a 2 to 1 ratio. Fast forward to today. We've got the sub-concession, which may or may not be legal. And the gaming academics and lawyers are still debating that. And the Americans have ended up with 50% of this dominant industry in the Macau landscape. So this is the first opportunity for China basically to reset the table here in Macau.

So with that in mind, you've got to look at the two parties. You've got the local operators. And you've got to look at foreign operators. So the local operators will probably be-- you'd probably rank them in terms of their relationship with the Macau government, and more importantly, with Beijing. And then you've got to look at the foreign operators, what they have done in Macau, any history they may have had with the Macau government and Beijing, and how that would stand them in state. So in terms of favorites, I'll probably be putting Galaxy as my local Macau favorite. Now, in terms of which foreign operators are likely to be at risk, they'll probably be Wynn and Sands because of their previous relationship with President Trump. And there are a couple of other issues as well, which I can't go into here.

- Is it highly likely, Ben, that the US Casino operators just won't be operating in Macau anymore?

BEN LEE: There is always that scenario. And I think that has never been priced into the value of the stocks. There are two possible-- basically, there are three possible outcomes. One, they get a new concession and they get to remain in Macau. Two, they don't get a new concession. And basically, everything reverts back to government under the terms of the old concession. Or three, which is probably a compromised solution, and that is for the American operators to be diluted out. They can still probably have the management rights to the gaming. But they may not necessarily have majority control. And I think that could be a possible compromise solution in a final wash.

- I'm wondering, Ben, is this space overall, Macau gaming space, still investable? And if so, is now the right time to go in now that we have had this route in so many of these major names because already there has been a lot of pressure on the industry with travel constraints and the pandemic. So what is your overall expectation for this recovery?

BEN LEE: So in the short term in the next 12 to 18 months, the recovery is likely to be very, very slow because Macau has a zero-COVID strategy, which has been very, very successful to date. What we look for in the long term-- and this is a scenario that we actually dived into last year-- is that there are moves afoot to possibly introduce the digital renminbi as Macau's default currency.

So I don't know if you know, but basically the default currency in the Casino here in Macau is not our local currency, which is the patacas, but the Hong Kong dollar, which is freely convertible and exchangeable. And that in itself is an issue. So the Hong Kong dollar is replaced by the renminbi as a default casino currency. That essentially would allow China to maintain control over the transfer of funds from Mainland China Macau. It basically would bring the whole of the Chinese market into Macau as a domestic mass market, something which we've never really. And that basically is a blue sky scenario if and when that happens.

- Ben, I have to say, you probably just helped millions of investors on the Yahoo Finance platform right now understand this very complicated situation that appears to continue just to rattle these stock prices. Ben Lee, managing partner at IGamiX. Good to see you. Appreciate these insights.

BEN LEE: Thank you.