Macau’s VIP gaming segment, which recorded a year-on-year decline in gross gaming revenue (GGR) in the first quarter, might see weakness in Chinese consumer demand for the rest of 2019 due to United States-China trade tensions, several industry observers told GGRAsia.
Luiz Lam, a director at a Macau junket trade body called the Association of Gaming and Entertainment Promoters, stated his organisation believed a year-on-year decline in such local VIP gaming was a “definite” for the remaining months of this year. The trend of annual decline might also extend until immediately before the Chinese New Year holiday peak tourism period in 2020, which will fall in late January.
For 2019, “in these coming months, I will even find it acceptable if the VIP GGR [market wide] only falls by low single-digits” of percent year-on-year, Mr Lam remarked to us.
Referring to consumer confidence among rich Chinese casino customers amid the U.S.-China trade tussle, and to player repayment of debts on credit issued to them by junkets, Mr Lam noted: “Even if a gambler still comes here to play now, we will question if he has enough money to pay back.”
Despite an improvement seen in Macau’s VIP gaming segment in the first few weeks of May – partly helped by “short-term junket liquidity” funded for the Labour Day break and “easier comps” – the city’s gaming operators and junkets are not optimistic about the prospects for VIP gaming demand, suggested a recent report from investment bank Morgan Stanley, following what it said were conversations with Macau’s gaming concessionaires and some junket operators.
“VIP seems to have improved in the first few weeks of May, with volume running approximately flat year-on-year, compared to down 20 percent year-on-year in the first four months of this year… Unfortunately none of the operators or junkets is showing confidence that VIP trends or demand are organically improving, despite investors’ hopes and positive macro leading indicators,” Morgan Stanley wrote.
Moderating growth in China’s economy amid the U.S.-China trade war; and regional competition for Chinese VIP players’ custom – especially at Indochina casinos – were factors contributing to the persisting weakness seen in Macau’s VIP gaming performance, two commentating organisations respectively said. They cited differing reasons for Indochina’s influence.
Trade war, regional competition
“The trade war is the biggest factor, as it has driven and will continue to drive our bread and butter customers out from neighbouring Guangdong to Indochina,” IGamiX Management & Consulting’s managing partner Ben Lee remarked to us.
“Those manufacturers and exporters have been relocating their operations to those countries [in Indochina] and the SME [small and medium-sized enterprise] owners who have been providing the bulk of our premium mass will start to see their business tail off as a result. The continuing contraction in jobs will in turn impact our grind mass albeit delayed,” Mr Lee additionally noted to GGRAsia in an email in response to our enquiry.
In a note to investors, brokerage Union Gaming Group LLC stated: “There is a growing realisation that Macau VIP play (or, in some cases, liquidity) is bleeding to regional markets, with Cambodia and Vietnam being the primary beneficiaries.”
Analysts Grant Govertsen and John DeCree added, alluding to Indochina jurisdictions having either lower or no tax on gross gaming revenue compared to Macau’s effective rate of 39 percent: “VIP junkets can earn outsized commissions without having to twist the arms of their customers to go to a jurisdiction they would otherwise avoid.”
They added: “This has become apparent as newer and higher-quality properties like Naga2 [in Phnom Penh, Cambodia] opened, as well as the upcoming opening of Suncity’s [Group Holdings’] Hoiana in central Vietnam. In addition, there has been significant development in markets like Sihanoukville [Cambodia] that is being supported by virtually every major Macau junket.”
Union Gaming revised downward by 7 percentage points its 2019 estimate for VIP GGR decline: it now thinks such contraction will be 15 percent year-on-year, rather than 8 percent.
“We estimate that the four geographically closest markets to Macau siphoned more than US$1.4 billion in VIP GGR away from Macau last year, which negatively impacted Macau’s VIP growth rate by up to approximately 900 basis points,” the Union Gaming analysts wrote, referring to the casino jurisdictions of Cambodia, South Korea, the Philippines and Vietnam.
Smoking, money transfer
Some commentators have mentioned that the city’s VIP gaming operations might have not been helped by more stringent controls over money transfer for VIP gaming agents, and the city’s ban on tableside smoking in VIP as well as mass-market areas.
“The continuing crackdown on the channeling of funds, be it through UnionPay or the new [mainland China] foreign exchange regulations announced in February this year…have made the repatriation of funds not only more challenging, but also much more costly, and again, this will continue to impact all segments of the market,” IGamiX’s Mr Lee noted.
Even the tightly-regulated neighbouring market of Singapore still allows casino-floor smoking. In Macau, tobacco use on casino floors is now restricted to smoking lounges separate from the tables and slots.
Updated Macau smoking rules had “made some high-rollers feel offended,” said the junket sector’s Mr Lam. “They would prefer to gamble elsewhere in Asia where there are fewer rules on smoking control,” he added.
Mr Lam, who currently works at Macau-based junket firm Golden Group, said “negative” issues in the Macau VIP sector such as certain controls over cross-border capital transfer for VIP gaming agents and the smoking ban at VIP gaming tables were factors that could still be “overcome”. He noted: “For issues like the stringent controls on capital transfer or smoking ban, we can still digest the extra costs involved.”
But Mr Lam believed that Macau might see more smaller-scale VIP gaming operators exiting the market in the near term, due to a more challenging business environment and higher operational costs.
“There are definitely some existing [junket] licence holders returning their licence [to the regulator]…with the smaller ones exiting the market due to profitability declines, or that they just cannot do business here in Macau,” Mr Lam remarked to us.
The total number of licensed junkets in Macau fell from 109 in January 2018 to 100 this year, according to data released by the city’s gaming regulator in late January. This latest tally also marked the city’s sixth consecutive year of decline in the number of licensed junkets in the Macau market.
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Credit rating agency Fitch Ratings