Sources inside and outside the Macau casino industry say some VIP gamblers have stayed away from the city because of the corruption crackdown in mainland China. They add that this probably accounts for the three months of consecutive year-on-year decline in Macau VIP revenues seen in June, July and August.
It was reported as long ago as February 2013 by The Times of London – quoting unspecified mainland official sources – that the central government had moved to bind the Macau junket operators more closely to it, in an effort to monitor the amount and source of money from the mainland that was passing through Macau VIP gaming rooms.
Gaming analysts now say that high-end premium mass players, similar to VIPs, prefer to keep a low profile in face of the anti-corruption drive in mainland China, launched after Xi Jinping was elected president in March 2013.
If 18 months later the anti-corruption campaign is causing VIPs to stay away from Macau in significant numbers and starting to show up in analysts’ reports as possibly meaning the Macau market might shrink in year-on-year terms in 2015, it raises a question as to whether the corruption crackdown has gone too far. Might it now be having the perhaps unintended consequence of pushing Chinese VIP play offshore, where it might be harder for the Chinese authorities to monitor?
“It is our assessment that their [the central government’s] near term goal is not to eradicate the [Macau] junkets but rather to establish a situation where they may be controlled – or better controlled,” Steve Vickers, chief executive of Steve Vickers and Associates, a specialist political and corporate risk consultancy, told GGRAsia.
“Effectively the junket sector, along with underground banks, is going through an extraordinary change and some form of ‘gentrification’ is occurring with consolidation and the acquisition of major junkets changing the whole landscape,” added Hong Kong-based Mr Vickers.
The term “underground banks” is a reference to lending institutions that have sprung up inside mainland China. They are not subject to the same tight regulatory restrictions as the state-owned banks regarding issues such as to whom they can lend and what collateral can be accepted for such lending, according to Joe Zhang, a former banker with UBS AG in Hong Kong, who now works in the regulated micro credit sector on the mainland.
Mr Zhang has pointed out that many of these so-called ‘underground’ institutions are nonetheless regulated by the state in some way.
Pull and push
Industry sources have told GGRAsia that some non-mainstream lenders in China are involved in lending money against the value of property owned on the mainland. In some cases, some of that money finds its way to the credit-funded Macau VIP gaming tables, the same industry sources have told us.
But Mr Vickers said: “…the future of Macau VIP gaming is not as rosy as hitherto; whilst we believe the mid-market segment still has room to grow. Those [Macau] casinos with greater ‘bandwidth’ and less dependence on core VIP gaming will benefit in the longer term,” added Mr Vickers, a former senior detective with the Royal Hong Kong Police.
“Those VIP operators and junkets who cannot stand this scrutiny or whose players require greater ‘anonymity’ will be driven offshore. We are seeing signs of this now,” he warned.
The ‘push’ factor of the mainland crackdown might not be the only force at play. There are also ‘pull’ factors relating to commercial considerations, industry sources have suggested to GGRAsia.
Those pull factors include lower gaming tax in other Asian casino jurisdictions, giving junkets and casinos with operations outside Macau more leeway to share some of their gambling income with the players. Macau has one of the highest gross gaming revenue (GGR) tax rates of any regulated market.
The territory’s direct tax from gambling at 35 percent of the gross plus other contributions bring the effective tax rate on casino wagering in the city up to 39 percent, leaving a modest amount of money to share between the junkets and the casinos after player reinvestment costs and other overheads are accounted for. It is the volume of play that delivers the profits on Macau VIP play. Once that volume starts to fall for whatever reason, the VIP room business model becomes less attractive.
Deutsche Bank analyst Karen Tang said in a note on Monday that agents are finding it increasingly difficult to collect gambling debts from VIPs in mainland China. As agents ask for longer credit periods under the current anti-corruption climate, small junkets are being squeezed out because they “are unable to offer these new terms given tight cage capital,” wrote Ms Tang.
China’s crackdown might merely have given some Macau junkets and some Macau players the final ‘push’ needed to explore other markets.
Tim McNally, chairman of NagaCorp Ltd, the developer and operator of the NagaWorld casino resort in Phnom Penh, Cambodia, in August told GGRAsia that his company had signed two junket operators from Macau as business partners and planned to fly some customers to NagaWorld starting this month.
“We offer VIP services that that level of player would not receive in Macau,” Mr McNally told us.
In May, in an interview with GGRAsia, Mr McNally had given some of the specifics for that.
“We don’t have a GGR tax like Macau. We pay a flat tax that’s based on everything from the number of gaming machines to the tables that you operate. We pay a flat tax of around US$500,000 a month,” he said.
The flat rate of gaming tax is adjusted upward each year by around 11 percent, added Mr McNally, pointing out that the downside of a flat tax is that you pay it regardless of whether you have a good year or a bad year.
He added that his company offers agents bringing in overseas players “a split in terms of revenue that’s very favourable for the junket operators, because we want to increase the rolling obviously”.
Matt Hurst, executive vice president gaming operations and marketing at the under construction Manila Bay Resorts in the Philippines, recently told GGRAsia that some of the existing private sector casinos in Manila are offering junkets 50 percent revenue share, versus operators in Macau offering 40 percent or 42.5 percent revenue share.
Tax on VIP play in the Philippines is the equivalent of 15 percent of the gross.
One challenge faced by some jurisdictions when it comes to building a sustainable business from Chinese VIPs, is that they often don’t have the same range and depth of channels to move large amounts of money from mainland China to foreign casinos to settle credit-based play than do the junkets focused on Macau.
“I can see that being a potential limiting factor on Macau junkets moving players’ money from China to foreign casino jurisdictions” said Ben Lee, managing director of gaming industry consultancy IGamiX Management and Consulting Ltd.
“Some Asian and Asia Pacific jurisdictions might also be open to long-arm regulatory pressure from the U.S.,” added Mr Lee.
He says an example is Tinian Dynasty Hotel and Casino in the Commonwealth of the Northern Mariana Islands, a U.S. territory. In June, George Que, a VIP services manager from the property was one of several managers that accepted a deal with the U.S. District Court there.
Mr Que was among those charged with a conspiracy to allow gamblers to conduct transactions involving more than US$10,000 without filing the required paperwork with the U.S. government, reported the Saipan Tribune newspaper.
The indictment, which was first filed in May 2013, also charged casino manager Tim Blyth and a firm called Hong Kong Entertainment (Overseas) Investments Ltd, added the newspaper.
Mr Blyth had earlier accepted a similar deal from an assistant U.S. attorney, whereby what is known as a deferred prosecution agreement was concluded.
Golden olden days
Some investment analysts believe however that even in Macau the days of more or less unfettered access to cross border funds by Chinese high rollers might be over.
A research note from investment analysts Kenneth Fong and Isis Wong of Credit Suisse AG in Hong Kong said on September 16: “…as the dust settles and players return, [Macau] VIP revenue could gradually recover. However, longer term, part of the VIP revenue would be hurt permanently as the ‘easy money’ could be significantly reduced in the future.”
Mr Vickers thinks there are signs of systematic intervention by Beijing in the Macau VIP sector.
Steve Vickers and Associates “believes that the PRC [People’s Republic of China] government has had a close look at the [Macau] junket operation in the wider context of capital flight – the corruption campaign and overall management of the renminbi [Chinese currency],” he said.
“Greater disclosure and public discussion as to the unsavoury nature of triad societies and their roles within some junkets is also a factor,” added Mr Vickers. “…we believe that some [junkets] are viewed as being too unsophisticated or directly linked to the ‘old Macau’,” he added.
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Tax revenue collected by the Macau government from the city’s gaming industry for May