Macau’s junket model is likely dead and the city faces a painful period of economic transition, although the vast amount of capital that flowed out of China for gambling is still likely to find an exit and online is expected to be the beneficiary.
These were some of the key takeaways from Asia Gaming Brief’s webinar, held on Dec. 9th, to explore whether there is a future for junkets following the arrest of Suncity CEO Alvin Chau at the end of November. Chau was detained in Macau, just one day after a warrant for his arrest was issued on Mainland China, on charges of organizing illegal gambling and money laundering.
Since his arrest events have moved fast, with Suncity winding up its business, at least three of the concessionaires terminating all their junket operations and other junkets, such as Tak Chun Group reportedly laying off staff.
“We all knew that junkets were going to go down but the speed with which they are on their way down is mind-boggling,” said Alidad Tash, managing director of 2NT8 and one of six participating speakers.
The arrest of the head of Macau’s biggest junket has shaken the assumption that Macau would be exempt from China’s crackdown on jurisdictions targeting its nationals for gambling in an attempt to block an estimated $150 billion flowing overseas annually into casinos and online gaming sites.
“Macau was finally targeted,” said Carlos Simoes, partner at law firm DSL. “At the beginning, there was an impression that only other (jurisdictions) would be affected, but now we know that Macau won’t be exempted and Macau will have to restructure its economy and industry to reflect that change.”
He pointed out that outside of the casinos, many of the high-end restaurants and services in Macau have sprung up to cater for VIP clients, which is likely to have a major impact on the local economy.
Tash estimates that about 50 percent of junket play, which totalled $11 billion in 2019, will be lost in the fallout from Chau’s arrest, with the remaining 50 percent likely to be split between premium mass and direct premium.
However, how it shakes out from there is more complicated and will depend on just how much China’s crackdowns affect capital inflows into Macau. Under his modelling, the best-case scenario would see outflows remain the same, which he said is highly overly optimistic.
A base case might see capital outflows reduced by 25 percent, while a worst case will see a 50 percent reduction. He says he currently believes that it will be somewhere between the two with operators likely to take a hit of between 10 and 15 percent to EBITDA.
However, the question remains as to how the players will get access to credit, as legally they are only allowed to bring $50,000 a year out of China, which is a drop in the bucket compared to the amount an average premium player would be expected to play per hand.
Much of the debate centered on the timing for the arrest, given that junkets have been operating as legally licensed entities extending credit to players for more than a decade.
Steve Vickers, founder of political risk consultancy Vickers & Associates, said China wasn’t specifically targeting Macau, but the city has been caught up in a broader wave of changes targeting all sectors of the economy, from technology firms to real estate.
Beijing has lost patience with Macau’s lack of progress on economic diversification and will push very hard to turn it into something different from what it is at the moment.
“It will be a very painful exercise and it also brings up pretty scary issues for the concessionaires, the pension funds and others that have invested in them.”
Martin Purbrick, of Purbrick & Associates, said Beijing’s decision to take down the king of the junkets was like “killing a chicken to scare the monkeys.” Suncity’s overseas online operations had become too large, with Macau also being used as a conduit for capital outflows, perhaps accounting for about a fifth of the total leaving China.
“Typically, the (Chinese) government is slow to see and understand certain problems, as some regions don’t like to report, but once they do they crack down hard.”
Purbrick said, however, that he’s very sceptical that China will be effective in ultimately controlling the capital outflows and hot money will somehow find a way out of China. He said online gambling is likely to be a key beneficiary.
“The biggest question is not how you stop junkets but how you stop money coming out online, that is going to grow,” he said.
The webinar also discussed who may benefit from the capital outflows if they are no longer being funnelled into Macau and how the crackdown would affect other jurisdictions in the region, where many large properties have been developed with the China VIP market in mind.
“They are not going to just crackdown on Macau, they (China) are going to follow where those players go,” said Ben Lee, managing partner of IGamiX Management & Consulting, which has carried out many feasibility studies across Southeast Asia.
He said his company is advising clients to revisit their business models as it’s no longer applicable, with some relying on VIP for as much as 80 percent of the bottom line.
“They will have to revert to a mass centric model to cover all the costs with the VIP giving you the cream,” he said. “However, in almost all jurisdictions gaming isn’t allowed, or isn’t encouraged, so where are they going to source their mass. There needs to be severe cost restructuring to bring the cost base in line with the new operating reality.”
In terms of the online gaming industry, Lee said China will still seek to crackdown and is already stepping up its pressure on Cambodia, where the practice is rising again after being banned from the beginning of 2019. He said some are looking as far afield as Georgia to avoid China’s scrutiny.
One regional market that has had a similar sharp shock with junkets is Australia, where they have been banned following a series of damaging revelations that emerged from inquiries into Crown Resorts, which uncovered large-scale lapses in corporate governance and money laundering.
Fitch Ratings analyst Kelly Amato outlined how the operators downunder had reverted to focus again on the local mass market, which has provided strong support.
“On the whole Australian operators’ business model remains intact and that reflects in Fitch retaining its BBB rating on Crown which is one of the highest ratings globally. We also don’t think that it will mean all the loss of VIP as they will transition to direct VIP or premium mass.”
Other topics discussed in greater detail in the webinar was the overlap between Chinese and Macau law. The junket industry has effectively shrivelled up without any changes in the actual legislation to ban their activities, while the local regulator has told the firms they can no longer extend credit, even though the practice is legal in Macau law.
Simoes said there needs to be greater clarity as soon as possible on some of these issues.