Inside Asian Gaming

November 2016 inside asian gaming 27 In Focus even greater consolidation. The new openings reportedly came with increased liquidity, and that links to another trend. FAITH RETURNS Noting that September marked the one year anniversary of a Dore Group employee absconding with an estimated HK$330 million (US$42.5 million), Morningstar Asia Equity Analyst Chelsey Tam reports renewed faith among lenders to junkets. “According to our check, confidence in the safety of the deposits in the junket system has continuously improved since the new year, helping liquidity and thus VIP rolling in the junket market,” the Hong Kong based analyst says. “The funding is coming from various individuals instead of just one or two big depositors, which leads us to think that it is more broad-based and more sustainable.” Since the Dore incident, Macau’s Gaming Inspection and Coordination Bureau, the casino regulator known by its Portuguese initials DICJ, has imposed new financial and reporting rules on junkets, spurring consolidation and lifting the game of survivors. Two recent developments should further boost Macau’s VIP revenue. After embezzling an estimatedHK$10 billion, former KimrenGroup junket executive Huang Shan has emerged from hiding and, working with Hengsheng Group, promised restitution to bilked investors. Perhaps more important than repayments, the situation demonstrates junkets retain the power to keep their own industry in order. Employees of Australia’s Crown Resorts arrested in a series of raids last month in mainland China underscored the risks of marketing casino properties there. Mainland law prohibits promoting gambling, so casinos highlight their non-gaming aspects, but boundaries are not clear; what was allowed yesterday may be prohibited tomorrow. Casinos have reportedly withdrawn marketing teams from the mainland, meaning they’ll rely more on junkets to find mainland high rollers. The arrests may also put an exclamation point on Chinese government warnings about patronizing “overseas” casinos, rather than gaming in Macau. Junkets have been ranging beyond Macau, where clients can get better rebates (out of junkets’ higher profits) and perceived greater privacy than Macau. Junkets contacted by Inside Asian Gaming wouldn’t comment on whether they interpret the Crown raids as a signal to keep business in Macau, where it’s much easier for mainland authorities to track players and the local government gets its 39% tax levy. HISTORY REPEATS The recent spike in VIP revenue follows Macau custom. “VIP has historically led Macau into and out of downturns,” Wells Fargo Securities Senior Analyst Cameron McKnight says. “When revenue growth slowed in 2012, when fears of a hard landing in China were paramount, it was led by VIP. When revenues recovered and took off in the second half of 2013, it was led by VIP. However, the VIP business carries low gross margins and is quite volatile. For this reason, investors consider VIP earnings lower quality than mass, which is more diversified, sticky and higher margin.” JP Morgan forecasts VIP revenue will account for just 12% of operators’ EBITDA this year. In Macau, there are more than practical reasons to believe that only mass market revenue will lead to sustained recovery. “A VIP-led recovery would not be sustainable, if for no other “Following the Cotai resort openings, Morgan Stanley Asia upgraded Wynn Macau and Union Gaming upgraded Las Vegas Sands on the strength of its Macau business. But even if Macau has turned the corner, questions remain about whether it’s on the road to sustainable long term growth.”