Japanese brokerage Nomura says an ongoing audit programme of the credit issuance records for Macau’s licensed VIP gaming promoters could have a “negative impact” on the high roller segment.
The brokerage said in a note issued on Tuesday that the audit programme could reduce liquidity among VIP gaming promoters – a group of businesses also known as junket operators.
The Macau government confirmed to GGRAsia last week that it had started its previously-announced audit programme of the credit issuance records for the city’s 126 licensed junket operators. “Over 60” are being assessed in the first tranche of audits, the city’s casino regulator, the Gaming Inspection and Coordination Bureau, told GGRAsia at the time.
The audit was mentioned in the government’s policy address for 2017, as presented in November by the city’s Chief Executive, Fernando Chui Sai On.
“Temporary deposits” accepted by junket operators would also be looked at by the government as part of the audit work, Mr Chui had noted at the time.
Macau junket operators have commonly raised capital for their casino rolling chip programmes by offering private investors above-market interest rates for their deposits. That capital is then used to extend credit to VIP players mostly coming from mainland China.
“In our view, investors should neither dismiss the intent behind the government’s audits nor disregard the possible negative impact they will have on recent momentum in the VIP segment,” Nomura said.
The brokerage noted that “a significant source” of recent junket liquidity is related to customers and agents in mainland China who, “for fear of further devaluation of their currency”, have been increasing the amount of their renminbi deposits with junket operators in Macau.
Most bets at Macau casinos are denominated in Hong Kong dollars, a currency pegged to the U.S. dollar. Macau’s currency – the pataca – is indirectly pegged to the U.S. dollar via an association with the Hong Kong dollar, whereby MOP1.03 is approximately equal to HKD1.00.
“We believe this rapid increase in customer deposits not only has been a primary driver of recent VIP outperformance but also has started to attract the attention of government regulators,” Nomura stated. “The question now is whether… these junket audits can/will threaten that liquidity-driven momentum.”
Casino gross gaming revenue (GGR) in Macau’s VIP segment expanded by 16.8 percent year-on-year in the first quarter of 2017, according to data released earlier this month by the local regulator. Mass-market casino GGR – including that from slot machines – rose by 8.5 percent from the prior-year period.
Nomura said Wynn Macau Ltd had been the casino operator benefitting the most from the recent increase in junket liquidity. “So, to the extent the government’s audits have the effect of reducing junket liquidity, we believe that Wynn Macau Ltd potentially has the most to lose.”
Wynn Macau Ltd has been historically one of the Macau-based operators with the biggest exposure to the VIP sector, say several investment analysts. During the first quarter of 2017, the firm reported aggregate table games turnover in VIP operations of US$24.32 billion at its two Macau properties.
Prudent step: Sands China
Commenting on the junket audit programme during a conference call with investment analysts on Wednesday, the chairman of Sands China Ltd, Sheldon Adelson, praised the government’s action.
“I think the Macau government is being prudent,” he said. “They don’t want any repeat of what happened before. And I take my hat off and I salute the Macau government for doing so.”
Mr Adelson’s comments were thought to be a reference to a string of events that took place in Macau in 2014 and 2015 which shook the confidence in the junket system. The cycle of troubles began in April 2014, when a junket operator called Huang Shan – who had offered a high monthly dividend of 2.5 percent to junket investors in exchange for junket capital – fled with an amount reported to be as much as HKD10 billion (US$1.29 billion). In September 2015, another similar case emerged, as Macau junket operator Dore Entertainment Co Ltd announced it had been a victim of internal fraud by a former employee.
During Wednesday’s conference call with analysts, Robert Goldstein, president and chief operating officer of Las Vegas Sands Corp, which is the parent of Sands China, stated the firm was unware of the extent of the junket audit programme. “I don’t think in the end it’s going to be that impactful,” he said.
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VIP share of Macau's gross gaming revenue in the third quarter of 2021