GGRAsia – Chau arrest warrant ‘really bad’ for VIP biz: JP Morgan

Chau arrest warrant ‘really bad’ for VIP biz: JP Morgan

Nov 27, 2021 Newsdesk Latest News, Macau, Top of the deck

The announcement on Friday by the People’s Procuratorate of Wenzhou city, in Zhejiang province, mainland China, that it had issued an arrest warrant for Alvin Chau Cheok Wa – the head of junket operator Suncity Group – is “really bad for the junket/VIP” gaming sector in Macau, says JP Morgan Securities (Asia Pacific) Ltd. But, according to the brokerage, the actual impact of the news on Macau-based casino operators is likely to be limited, due to the shrinking relevance of VIP revenue on the overall profitability of the latter firms.

Despite the decreased role of VIP gaming in the casino industry in Macau, the news of the arrest warrant for Mr Chau “could still weigh on sentiment,” the brokerage stated. “While the news is only directly related to junket/VIP, some investors may interpret this as a signal of a potentially broader clampdown on gambling itself, a view that we don’t agree with but cannot disprove.”

Mr Chau (pictured in a file photo) “is arguably the biggest (and certainly most famous) figure in the junket industry, as the founder/chief executive of the undisputed biggest junket in the world, Suncity Group, which accounted for 40 percent to 45 percent of the junket market” in Macau based on 2019 figures, said JP Morgan in a note issued on Saturday, titled ‘Adios, junkets’.

Analysts DS Kim, Amanda Cheng and Livy Lyu added: “The fact that even he can be arrested – for just running the junket and doing (what seems to us like very) normal junket activities – should send a chill down the spine of any and all junkets.”

The JP Morgan team stated it “wouldn’t be surprised to see junket VIP revenues [in Macau] immediately contract in the coming weeks,” following the news of the arrest warrant for Mr Chau, “perhaps by 30 percent to 50 percent from current run-rates.”

Macau-licensed junket operator Sun City Gaming Promotion Co Ltd – the main gaming arm of Suncity Group in Macau – told GGRAsia by email early on Saturday that “all [its] businesses are normally operating”, despite the arrest warrant for Mr Chau.

Detailed read of the arrest warrant

The JP Morgan team noted that the arrest warrant announcement by the People’s Procuratorate of Wenzhou city included a few surprises.

“The document also refers to Suncity Group’s activities in Macau, suggesting the scope of ‘cross-border gambling promotion ban’ [by the mainland China authorities] does include Macau (versus market consensus of non-Macau casinos),” pointed out the brokerage.

There had been a variety of opinion among scholars and legal experts about whether China’s criminalisation of anyone assisting “cross-border gambling”, that came into effect on March 1, was meant to cover gambling in Macau, a special administrative region of China.

JP Morgan added in its Saturday note: “This is, from what we understand, the first high-profile crackdown on the junket’s senior management itself, because most (if not all) of the previous arrests and detentions over the past six-plus years have focused on agents and ‘foot soldiers’ who actually carried out illegal operations.”

JP Morgan also noted that the timing of the arrest warrant announcement was “somewhat worrying”, as it could “influence Macau’s view of the junket system into this important licence renewal period.”

That was a reference to the fact that Macau is deciding on how to proceed in June next year, when the rights of the six current casino operators are due to expire. So far, government officials have given few hints on the government’s plans for the casino sector, despite there being little more than six months to go before the expiry of the current licences.

Impact on VIP business

In its Saturday note, JP Morgan noted that Macau’s VIP gaming segment had already been struggling since 2020, impacted by a number of factors.

“We’ve already assumed structural impairment to this [VIP] segment given heightened scrutiny since 2020,” the analysts pointed out. “We’ve modelled VIP only driving 1 percent to 4 percent of operators’ earnings before interest, taxation, depreciation and amortisation in 2023 (or about 2 percent of sector profit as a whole),” stated the JP Morgan team.

It added that the VIP gaming segment “really doesn’t move the needle for our [Macau gaming market] estimates anymore.”

Macau’s junket sector has been shrinking for eight consecutive years. Travel restrictions associated with the Covid-19 pandemic, and China’s criminalisation of the organising of “overseas gambling” have added to headwinds that trouble the city’s junket sector, industry analysts have suggested.

VIP baccarat, which in 2019 represented nearly half of all Macau casino gross gaming revenue, accounted for only 31.8 percent of the city’s casino GGR in the three months to September 30, at MOP5.96 billion (US$744.1 million), according to official data.