Share

Macau junkets are finally on a roll, but will it last?

After haemorrhaging money and prestige since early 2014, Macau’s junket promoters’ luck appears to have turned. This month’s re-emergence of junket executive Huang Shan, who allegedly embezzled US$1.3 billion, and the detention in mainland China of 18 Crown Resorts employees suspected of illegally promoting gambling should benefit Macau’s junkets and VIP sector that still accounts for roughly half of the global casino capital’s gaming revenue.

Junkets play a vital role in Macau’s high-roller trade by helping players to skirt Chinese government requirements that bar its citizens from leaving with more than 10,000 yuan (HK$11,500) – equivalent to a single minimum VIP table bet – and restricts their overseas ATM withdrawals.

Beijing doesn’t want them, but what would Macau be without junkets?

Junkets recruit so-called VIPs for casinos, lend them money to play, then collect debts in exchange for roughly half of VIP profits, through a 1.25 per cent commission on their VIPs’ bets or a share of revenue.

Junkets finance operations through borrowing, paying interest of around 1 per cent a month, reflecting the inherent risk. Huang, who raised operating capital for junket promoter Kimren Group’s four Macau VIP rooms, offered even higher rates, then took the money and ran in April 2014.

What a mysterious death tells you about the future of Macau

Huang’s apparent disappearance, amid mainland China’s slower economic growth and President Xi Jinping’s (習近平) crackdown on corruption, contributed to a precipitous decline in the VIP sector, from 239 billion Macau patacas in 2013 to 128 billion patacas last year and a projected 111 billion patacas this year.

Macau’s registered junket numbers have tumbled from 235 in 2014 to 142 presently. Nearly all but the top three – Suncity, Neptune/Guangdong and Tak Chun – have trimmed their operations. Neptune’s Hong Kong listed arm has seen its price dive 90 per cent since early 2014, and recent financial reports read like autopsies. NASDAQ-traded junket Iao Kun Group shares tell a similar story.

New association to focus on casino junket operators

Early this month, Huang was found in Poipet, a casino cluster on Cambodia’s Thai border, where he was researching an investment, not gambling, according to Tony Tong, the vice-chairman of junket trade group Macau Gaming Information Association, which is part of the Justice Alliance hunting Huang.

Macau junket promoter Heng Sheng executive Zhang Zheng found Huang and convinced him to go to Ha Long Bay, Vietnam, where Heng Sheng has a VIP room at a foreigners-only casino.

Huang reportedly believes he’s safe in Vietnam but fears what might happen if he returns to Macau. Tong, founder of Pacific Financial Services, which advises the junket industry and invests in it, denied reports of a HK$100 million bounty on Huang. In a public statement, Huang declared he was ready to repay creditors who presented substantiated claims in person.

Finding Huang and getting at least partial repayment for creditors restores credibility to a junket system buffeted by tumbling revenue, player bad debt (gambling debts aren’t legally enforceable in mainland China) and increased regulation in Macau.

Along with boosting investor confidence, junkets are demonstrating they still have the power and prestige to adjudicate between Huang and his creditors.

Crown shares tumbled 14 per cent on Monday, the first trading day after news broke that international VIP head Jason O’Connor was among its 18 employees detained. Casino operators often try to recruit premium players directly, bypassing junkets to boost profits.

But marketing casinos is illegal in mainland China, so companies promote non-casino features, a charade authorities tolerate – until they don’t. Analysts differ on whether the Crown arrests are routine events getting more publicity because they netted Western executives or the leading edge of a wider crackdown.

Some things are clear. In the short run, many casino operators have withdrawn mainland marketing teams, increasing their reliance on junkets.

Meanwhile, the post-2013 growth of VIP revenue outside Macau – benefitting NagaCorp in Phnom Penh, Bloomberry Resorts and Travellers International Hotel Group in Manila, Imperial Pacific International in Saipan and even Donaco in Poipet – hasn’t escaped Beijing’s notice. (Ironically, after a growth spurt, Australia’s VIP revenue is falling this year, according to Morgan Stanley research.)

Macau junket operator accused of money laundering over HK$640 million to be joined by another defendant

Chinese authorities have decried citizens patronising “overseas” casinos, which observers say is aimed at encouraging them back to more easily monitored Macau.

“When the Chinese government sends agents to scrutinise the behaviour of its citizens in its own country, it is called ‘scrutinising its citizens’,” Global Market Advisors senior partner Andrew Klebanow observes. “When the Chinese government send agents to a foreign country to scrutinise the behaviour of its citizens, it is called spying.”

High rollers returning to Macau would benefit junkets, particularly smaller promoters that don’t venture overseas.

But despite recent wins, junkets are losing the war. Local and mainland government policy demands Macau become a tourism and leisure destination, with less focus on gambling, especially at the high end.

Macau third quarter figures show VIP revenue fell 1 per cent year on year, despite injections of credit to support the openings of Wynn Palace in August and Parisian Macao last month. The reclassification of tables from “high end mass” to VIP – to skirt the mass floor smoking ban – means the true VIP decline is about 6-7 per cent, Union Gaming in Macau and Buckingham Research in New York estimate. Actual mass market growth is up 10 per cent, they say.

The mass market sector, with far higher margins than the VIP sector, now accounts for a majority of gaming revenue and the lion’s share of profits. JP Morgan estimates the VIP sector will produce just 12 per cent of casino industry earnings before interest, tax, depreciation, and amortisation this year. In today’s Macau, VIP no longer means very important profits.