Brokerage Daiwa Securities Group Inc says it estimates that most of Macau’s VIP gaming promoters – also known as junket operators – are “struggling just to break even” in the current business environment.
“A high proportion of junkets is loss-making today (especially true if we include the impact of the sector’s estimated bad debts),” said Daiwa in a report on Friday.
Junket operators, that lend money to high rollers, are still under significant operating pressure with at least HKD30-billion (US$3.87-billion) in bad debt still outstanding, said analysts Jamie Soo and Adrian Chan in Hong Kong.
The report later qualifies this HKD30-billion figure as “healthy” bad debt, but notes it excludes receivables related to side-betting, stale and “bad” bad debts and “is a very conservative estimate”. The analysts say that based on their calculations, the total debt outstanding in the Macau VIP segment “could easily be double at HKD60 billion (or more)”.
One factor putting pressure on junkets is the ongoing slowdown in high roller play. This has had an effect on the capitalisation of the junkets, which depend on volume of play to smooth the impact of win volatility in baccarat, the table game of choice for high rollers, say investment analysts . Gross gaming revenue (GGR) in VIP baccarat – a segment heavily reliant in Macau on junket operators – fell by 40 percent year-on-year in 2015, and 19 percent year-on-year in the first quarter this year, according to data from the city’s casino regulator.
“The lengthening of the collection cycle, combined with the macro environment in China where capital flows are facing increasing scrutiny, have continued to increase the risk of bad debts,” said Mr Soo and Mr Chan.
Citing industry participants, Daiwa said that the bad debts in the entire junket system in Macau “could, at a minimum, be measured in multiples of the existing ‘healthy’ gaming debt, which we estimate at HKD30 billion”. These bad debts are distributed more heavily among the city’s smaller junkets, said the Daiwa team.
The softening casino business environment in Macau has led several junkets to cut back their operations in the city. Many junkets shut down VIP rooms during 2015. Some have started to explore opportunities in other regional markets, including the Philippines, Cambodia, Vietnam and even Australia.
Bad debt risks
In a recent interview with GGRAsia, Kwok Chi Chung, president of the Association of Gaming and Entertainment Promoters, said he expected the closures of VIP gaming rooms to continue. “The conditions will no longer be like what we have experienced in the first half of 2015 when the closures were a lot more frequent,” he added.
“This problem of rising bad debts continues to be a major issue in Macau, and is among the key drivers for the successive junket mergers and closures that we continue to see today,” said Daiwa’s Mr Soo and Mr Chan in Friday’s report.
The analysts expect the increase in debts on gaming credit and bad debts on such credit “to ultimately result in working capital problems and solvency issues, especially among the smaller junkets as we have seen in the past”. Daiwa said that based on its count, at least four junket rooms in Macau closed in February and March.
“The small-, [and] mid-sized junkets continue to bear higher operating pressures as they are negatively impacted by a poorer capital base (i.e., lower ability to have credit extended to them), narrower client reach, and limited ancillary services,” said Daiwa’s note.
A fortnight ago Mr Kwok told GGRAsia that the group was in talks with the local gaming regulator about the possibility of increasing the amount of capital deposit that any newly-registered VIP promoters must lodge with the authorities. If the idea were adopted, it would raise the required deposit to MOP10 million (US$1.3 million), from the current MOP100,000 level set in 2004.
The Daiwa team said the pressures on gaming promoters could also have a negative impact on Macau-based casino operators. The brokerage said total trade receivables in the industry declined by only 6 percent year-on-year in 2015 despite a 34.3 percent year-on-year decline in casino GGR.
Additionally, casino operators are collectively writing off an increasing amount of receivables – total receivables designated as impaired increased from 4 percent of sector earnings before interest, taxation, depreciation and amortisation (EBITDA) in 2014, to 9 percent in 2015, according to Daiwa.
Melco Crown Entertainment Ltd and Wynn Macau Ltd are potentially most at risk among Macau-based casino operators exposed to debt-ridden gaming promoters, said Daiwa.
“On our analysis, Wynn [Macau] and Melco Crown stand out for being the most exposed of the operators to: 1) the riskier portion of the junket business, and 2) to premium-direct business,” said Mr Soo and Mr Chan.
The cost of potential liabilities borne by casino operators “could be very high (i.e., junket failings, absconding of capital)”, said the Daiwa team, adding that while these costs don’t pose a risk to the casino operators’ short-term profit, they could put them be at risk from a legal, corporate governance, and balance-sheet perspective.
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"The [Macau] government has a lead in this subject in regards to what should be done after the [gaming] concessions expire. We will be first listening to what the government will say”
Ambrose So Shu Fai
Vice-chairman and chief executive at Macau casino operator SJM Holdings