Don’t Bet on Macau’s VIP Gaming – But Mass Market Casinos Will Do Well
Renato Marques on Unsplash

Don’t Bet on Macau’s VIP Gaming – But Mass Market Casinos Will Do Well

6th December 2021 | 6 min read

The Chinese government will severely reduce the VIP and premium mass gaming markets in Macau in the next few years. Therefore, it is not a good idea to bet on Macau casinos, which are unlikely to successfully shift from these segments to the mass gaming sector. 

Beijing will flatten the VIP and premium mass markets in Macau immediately with its recent crackdown on VIP junkets and in several years with the introduction of China’s digital yuan in the semi-autonomous city, Eric Coskun, director of casino projects at IGamix Management & Consulting, a Macau-based gaming consultancy, told Bread News. 

A VIP player typically gambles hundreds of thousands of dollars per day. Junket operators would bring VIP gamblers to casinos while supplying them with credit as well as luxury accommodation, limousine service and sometimes private jet flights. Premium mass players are not served by junket operators and predominantly consist of walk-in visitors who do not enjoy the same luxury amenities as VIP players, but have access to reserved seats and other services not available to mass players. 

In Macau, the digital yuan will reduce VIP gaming by roughly 80% and premium mass gaming by 50%, Coskun predicted. “However, in the long run we see solid growth in normal mass gaming which has a much higher EBITDA (earnings before interest, tax, depreciation and amortization) margin than VIP.”

Macau’s biggest junket operator, Suncity Group Holdings, controls over 50% of Macau’s VIP GGR, while 80% of the funds reaching VIP gaming rooms in the city is done via shadow banking and other methods that do not comply with China’s capital outflow restrictions, Coskun explained. Over 50% of the funds for premium mass gaming reach Macau through junkets, he added. 

“These impacts of the digital yuan on Macau casinos will be immediate, as soon as it is implemented, and continue well into the sunset,” said Coskun, who predicted China’s digital currency will be partly implemented in Macau in 2022 and fully rolled out there in 2023. 

If the digital yuan is used in Macau casinos, the Chinese government will be able to track the money transactions because the technology enables them to do so. Part of the funds that flow from mainland China through junkets to Macau casinos is dirty money which is laundered in the casinos.

On April 13, Macau chief executive Ho Iat Seng told the city’s Legislative Assembly that digital currencies were becoming globally accepted and Macau must follow this trend.

“Although Macau has not yet reached this process at this stage, we should follow the pace of the mainland government. We will keep communication with the People’s Bank of China and start a feasibility study around launching the Digital RMB in Macau,” said Ho. 

In the next few years, Macau’s gross gaming revenue (GGR) will recover, never to the levels of 2013 and 2014 of US$45 billion annually, but US$25 billion to US $30 billion by 2025, Coskun forecast. Even at these lower levels, operators may still record higher EBITDA than previous years, Coskun said. The beneficiaries of these future higher EBITDA figures will be the Macau casino operators that have a strong mass market presence such as Galaxy Entertainment Group, Sands China and Melco International Development, he added. Galaxy, Sands China and Melco are all listed in Hong Kong. 

Crackdown on VIP junkets

Macau’s junket business has already taken a hit with the recent arrest of Alvin Chau Cheok Wa, the former chairman of Suncity. 

“During the wee hours” of November 27, Macau Judiciary Police arrested the ringleader and 10 “backbone members” of a criminal syndicate in the city, said the police website on the same day. 

“In August 2019, the Judiciary Police learnt, by collecting intelligence, that a criminal syndicate had been exploiting its VIP junket business in Macao casinos to recruit mainland Chinese residents to engage in illegal online gambling by launching online gambling platforms overseas. The illegal proceeds of the syndicate were then laundered and transferred through the junket accounts of Macao casinos by means of illegal channels such as underground banks,” the police website added.

hiurich granja on Unsplash

Although the Macau judiciary police did not name those whom it arrested, Suncity said on November 29 that Chau was arrested by the Macau Judiciary Police. Chau resigned as Suncity chairman on December 1, the company announced on the same day. 

In the event that Suncity loses the support of Chau, its financial position and business will be adversely affected, warned the Hong Kong-listed firm’s announcement on November 29. Chau wholly owns a company, Sun City Gaming Promotion Company Limited (SCGPCL), a key junket operator which supplies hotel accommodation in Macau for VIP guests. For the first half of this year, Suncity’s revenue from SCCGPCL’s sales of hotel accommodation services amounted to RMB25.88 million, representing 17.4 percent of Suncity’s total revenue, according to the announcement on November 29. 

SCGPCL is unable to supply hotel accommodation services to Suncity in the near term, said Suncity’s announcement on December 1. Given this and the outbreak of the COVID-19 variant Omicron, Suncity has suspended its travel and hotel business for the time being, Suncity added. This effectively halts most of Macau’s junket business.

The Hong Kong share price of Suncity plunged 53.5 percent to 13 Hong Kong cents on December 2 over the past five days.

“Alvin Chau has been on the Chinese government’s radar for some time. By going after the biggest junket in the world, the Chinese government, through their proxy in the Macau government, is making a statement to all junkets,” said Coskun. “This was a huge warning to all junkets, comply with regulations or else.” 

“This, coupled with the imminent rollout of digital yuan to eliminate large outflow of funds through shadow banking which the junkets are quite extensively involved in, also acts as a wakeup call to all operators to not rely on Chinese VIPs and to retool their business strategies for Macau and the region,” Coskun added. 

Risks for Macau casinos 

A report by Steve Vickers Associates, a Hong Kong risk consultancy, on November 25 said Macau’s junket sector is under pressure. 

“The Macau government seems, under direction from Beijing, determined to diversify away from a total reliance on casino gaming”, said the report. 

But the threat is not evenly spread, the report qualified. US-owned casino operators are most exposed, given the current tensions between the US and China, the report explained. US-invested Macau gaming firms like MGM China, Wynn Resorts and Sands China have underperformed local companies like Galaxy on the Hong Kong stock market in 2021, the report noted. 

Over the past month, the share price of SJM Holdings decreased by 5% to HKD 5.34 on December 2, while that of MGM China dropped 9.6% to HKD 4.98, and Sands China declined by 2.2% to HKD 17.32 and Wynn Macau fell 8.2% to HKD 6.31. By contrast, the Hong Kong share price of Galaxy Entertainment rose by 2.7$ over the past month to reach HKD 42.60 on December 2. 

Bread’s had previously held a positive outlook on Galaxy Entertainment, with one author doubling their bet after its stock price dipped following regulatory announcements. We’re still retaining a long term buy position but irattic short term volatility might be too much for some to stomach.

Written by Han Shih Toh
Toh Han Shih is currently chief analyst of Headland Intelligence, a risk consulting firm in Hong Kong. He has been a journalist writing about business, politics and economics related to greater China for over 15 years, including at the South China Morning Post, MLEX and Finance Asia. During the late 1990s, he was a reporter in Singapore with the Business Times, reporting on technology, e-commerce, Internet and the dotcom bubble.
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