China's Macau review could spell bad news for gaming industry

With the casino business in Las Vegas taking a huge hit during the recession, companies including Las Vegas Sands (LVS), MGM Mirage (MGM) and Wynn Resorts Ltd. (WYNN) have looked east for profit -- as far as Macau, the world's biggest gambling center. On Monday, however, the Chinese city's government threw a pail of cold water on their plans by suggesting it may limit the aggressive expansion in this booming market.

According to the Wall Street Journal, representatives of Macau's government met with casino operators to "review" the industry and lay down new restrictions, including raising the age for gaming from 18 to 21. Last year, the Chinese government clamped down on travel to Macau from nearby Guangdong province, ostensibly to fight gambling addiction, resulting in a drop in revenue. Since then, however, restrictions have been loosened and returns from the casinos hit a new high in August of $1.4 billion.

The prospect of more restrictions comes at an unfortunate time as these cash-poor companies look for new partners to bankroll their Macau expansion. Wynn recently floated an IPO for 25 percent of its Macau operations, raising a better-than-expected $1.63 billion. Las Vegas Sands, with its huge Cotai Strip development project on hold while it struggles with over $10 billion of debt, is planning a similar move.

At home, newly released Las Vegas traffic data from August offers the casinos little hope for quick relief. Convention business is down year over year by a huge 58.9 percent, with 300 fewer gatherings for the month. For the year, convention business is off 30.2 percent. Visitorship was down in August by 3.7 percent, the 15th consecutive month of decline. Room occupancy fell 6.9 percent last month and 6.2 percent for the year, despite aggressive promotions. MGM Mirage's troubled CityCenter development is expected to come on line by the end of the year, adding another 6,000 rooms to the mix.

If Las Vegas is saturated and Far East development constrained by the Chinese government, where should these companies turn for business growth? Harrah's recently bought a race track in Ohio, which has approved slot machines there and at six other tracks around the state.

However, a recent study by the Nelson A. Rockefeller Institute of Government found that state tax revenues from gaming have fallen by 2.6 percent over the past 12 months, suggesting that, while the gaming pool is growing wider, overall volume has remained stagnant. Without new markets (read: China) or a dramatic turnaround in Las Vegas traffic, a recovery in this sector seems distant.

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