It Doesn't Matter Who Your Daddy Is In Macau Anymore

It used to be that being related to one of the business titans who built the largest gambling center in the world out of thin air meant something in China. On Monday we learned it does not.

That is when, according to the South China Morning Post, a massive prostitution ring was busted in Macau - the world's largest gambling center.

Of the around 100 people detained - including 96 women from mainland China and Vietnam - there was only one among them who raised eyebrows around China (and in gambling circles). That was the nephew of billionaire scion Stanley Ho, Alan Ho.

Alan Ho is the executive director at the Hotel Lisboa, where the sting occurred, and where authorities allege that he controlled a syndicate occupying 100 rooms in the hotel since 2013. They also allege that the ring made $50 million a year.

Alan Ho's uncle, Stanley Ho, is the chairman of SJM Holdings, one of the first companies to be granted permission to start gambling operations in Macau when the island opened up in 2002. Consider that year the dawn of Macau casino time. Since then SJM has built 18 casinos and two hotels, including the Grand Lisboa and the Sofitel Macau.

In other words, Stanley Ho is one of the originators. He's 93 years-old. He's a boss.

But that doesn't matter anymore. Chinese President Xi Jinping has sworn to fight corruption all over the country, and that includes Macau. If that also means upending the island's social and business structure from its foundation, so be it. No one is immune.

And Macau's revenue is suffering for it. In 2014 revenue fell 2.6% - the first time it's EVER fallen since the island opened up. Wall Street analysts watched in horror as revenues collapsed through 2014, though they were hopeful a reversal would come up until the Q4 2014. Now they've tabled their hopes to the 2nd half of this year.

We expect to see another two Qtrs of YOY declines in GGR [Gross Gambling Revenue] before we see a reversal in trends. We expect stabilization in Q1, and modest sequential growth in Q2, and first positive YOY growth in Q3'15, helped by new supply and easier YOY comps. H2 growth should be better given new supply entering the market and ramp-up of new capacity that opens in H1. Fundamentally, we expect grind mass to drive mid-term recovery in H2...

In other words, they're saying that more casinos and hotels being built will bring Macau back to good. The problem is that this isn't a supply problem, it's a demand problem.

Macau's real money used to come from high rollers, but high rollers don't want to be as flashy as they were before for fear they'll be caught in the anti-corruption wave.

The high rollers know what can happen to them if they 're caught behaving out of line. For example: Millionaire casino mogul Paul Phua was even arrested in Macau for running an illegal World Cup gambling ring this summer. He managed to get out of Macau, but authorities caught up with him in Las Vegas and impounded his private jet. Stories like this were unheard of in the bad old days (last year), especially for men like Phua who has alleged ties to the Triad.

This new regime means that Macau needs to find another clean source of revenue, and fast. It's the same story we saw in Las Vegas in the 1970s and 80s, when the mobsters that built the city were pushed out of business by law enforcement. It is now time to make Macau a mid-market, family destination. It is time to book Celine Dione.

There's one issue with that happening immediately, though. China's economy is slowing down as it balances from one based on investment to one based on domestic consumption. The explosive growth of the middle class the world witnessed earlier this century isn't going to be there in the same way anymore, creating hundreds of thousands of new potential middle market gamblers.

Also keep in mind that it's going to be a rocky road until everything balances out. Analysts like Societe Generale's Wai Yao and Charlene Chu of Autonomous Research Asia have warned of the danger of the China's massive debt coupled with an economy in deflation. It's a toxic mix that means the country is generating less and less cash to pay its debts.

Chu told Bloomberg that those who ""believe that the country can grow its way out of the problem, but mathematically that's impossible when something is twice as big as something else and growing twice as fast."

Wei has said that only thing that will set things right with the economy is a full-scale restructuring of the corporate sector. No small thing.

In Macau all businessmen can do for now is prepare for the customer that will be, and things are already heading in that direction. Stanley Ho's son, Lawrence Ho, heads Melco Entertainment, along with Australian billionaire James Packer. Melco is planning to open a family friendly Macau casino called Melco Studio City in the third quarter of 2015.

Apparently there's a Batman ride.