Reports a Macau junket operator has lost as much as HKD2 billion (US$258 million) to alleged theft led on Thursday to a 4.6-percent decline in the share price of Nasdaq-listed gaming operator Wynn Resorts Ltd, according to analysts.
Wynn Resorts is the parent company of Wynn Macau Ltd, which operates a casino in Macau. Wynn Resorts has confirmed the affected junket operator, Dore Entertainment Co Ltd, runs VIP operations at the Wynn Macau casino-hotel.
“The current reported concerns with respect to Dore, one of Wynn Macau’s junket operators, have no direct financial impact on Wynn Macau,” Wynn Resorts told GGRAsia in an email.
The firm added: “Dore owes no money to the company and continues to operate in Wynn Macau.”
U.S.-based Sterne Agee CRT analyst David Bain said Thursday’s price volatility on Wynn Resorts shares was due to “a report citing a junket group internal theft/missing funds of up to HKD2 billion.”
He added: “The junket group operates at Wynn Macau, but is a separate entity and any funds lost specific to the incident would be limited to the junket group.”
Mr Bain did not identify the source of the report nor provided details about the case. But a note from analysts Anthony Wong and Angus Chan, from UBS Securities Asia Ltd, quoting “local industry and news sources”, stated that a junket cage manager was “suspected to have absconded with investor capital at Dore group, one of the larger junket groups in Macau”.
Mr Wong and Mr Chan’s note stated however that the amount involved in the case could be smaller than the HKD2 billion mentioned in initial reports.
“We note that as with the case of Huang Shan (HKD8 billion to HKD10 billion was the amount initially suggested) in April 2014, such initial figures could be inflated,” they said. The reference to “Huang Shan” was regarding a Macau junket principal that allegedly disappeared with a huge amount of cash last year.
The note from UBS stated that Dore group “has likely achieved monthly rolling of between HKD9 billion to HKD13 billion, accounting for around 4-5 percent of total junket volume in the industry. We believe the group’s main VIP rooms are in Wynn Macau (two rooms with at least 25 tables), and connected personnel have operations at hotel Lan Kwai Fong, which is a SJM [Holdings Ltd] third party casino.”
UBS estimated that the two Dore rooms combined could account for up to 25 percent of Wynn Macau’s junket volumes year-to-date. “This incident is likely to immediately negatively impact rolling volumes at least in the short term,” it added.
Mr Wong and Mr Chan said that while Dore is unlikely to have formal operations in other Macau properties, it is “likely” that some investors in the firm are also investors in other junket rooms in Macau. “For the wider industry, the incident could further undermine confidence within junket operators, leading to a more difficult liquidity environment,” the UBS analysts noted.
Daiwa Securities Group Inc analysts said in a note that its “on-the-ground checks have indicated an amount ranging from HKD200 million to as high as HKD2 billion” was involved in the case. “Even at the low end, [it] is material and quite significant,” analysts Jamie Soo, Adrian Chan and Jennifer Wu wrote.
The Daiwa team also noted that the news could have a negative impact on Macau’s largest operator, Suncity Group. Daiwa stated: “While it is difficult to ascertain the exact relationship between Dore and Suncity, there is an observable connection between the two… We expect the potential negative contagion impact from Dore to adversely influence the businesses of Suncity.”
Investment analysts at Credit Suisse AG in Hong Kong had a different view on the case’s impact on Suncity.
“Dore is currently operating a VIP room in partnership with Suncity. Although they operate under one brand, they maintain separate cage [functions] and will [each] bring their own players to the VIP rooms,” analysts Kenneth Fong and Isis Wong said.
They added: “There is no credit extension involved between the two. A junket agent with the deposit slip issued by Dore cannot get their cash at [the] Suncity cage. And we have confirmed such an agreement with Suncity. As such, the loss of money in the cage of Dore should not impact Suncity at all.”
The Credit Suisse team added it believed investors had “likely exaggerated” the extent of the Dore case. Its overall impact in the sector “is likely to be small if any”, Mr Fong and Ms Wong suggested.
They added: “The boss of Dore who reportedly owns a Macau casino and several pieces of land has agreed to honour the debt and the deposit put in by the junkets and the agents. From our checks, we didn’t see this event triggering capital flight at other small junkets last night. We believe that this will limit the impact to the system.”
VIP under pressure
Macau’s VIP segment has been the most hurt by the current slump in the city’s casino industry. Data from the Macau government for the second quarter of 2015 showed VIP baccarat GGR – the game of choice for Chinese high rollers – fell 42.2 percent year-on-year. Industry observers have linked the decline to the ongoing anti-corruption campaign by Chinese authorities, the slowing Chinese economy and also changes to visa policies to Macau, among other factors.
Junket operators play an important role in Macau’s VIP gaming segment. They recruit the high roller players in mainland China and beyond, and crucially make it their business to know how much the players are worth and what they have in assets. They extend credit to those players – in order to circumvent the strict currency flow restrictions between Macau and mainland China –, collect on losses and provide accommodation and other entertainment for the gamblers when in Macau.
The challenging VIP environment in Macau has already led many junket operators to downsize the scale of their operations in the city. Deutsche Bank AG said in a note on September 1 that “at least eight” Macau VIP gambling junket rooms had closed in August, but didn’t mention them by name.
According to several analysts, there also has been a significant increase in the repayment periods incurred by VIP players regarding credit extended by junket operators in Macau. Bad debt incurred by junket operators and their agents is also reportedly on the rise.
Rob Goldstein, president and chief operating officer of Las Vegas Sands Corp, parent of Macau casino operator Sands China Ltd, said on Wednesday that the gambling junket business model as applied to Macau is broken “for now”.
Brokerage Wells Fargo Securities LLC last week stated that, after meetings in Las Vegas with senior executives from casino firms with Macau operations, it had found uncertainty about the VIP segment persists. “A few operators even suggested that VIP play in Macau may never fully come back, citing a junket liquidity crunch and tighter policy toward Macau from the mainland [China government],” senior analyst Cameron McKnight wrote.
(Updated at 12.15pm, Sept 11)
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Chief executive of Wynn Resorts and Wynn Macau