In Macau, VIP Flight Means Cash Crunch

Macau’s VIP sector is being hammered as high rollers, fearful of Beijing’s crackdown on the cross-border flow of gambling funds, rush to withdraw billions of dollars held on deposit by junkets and their casino partners. It could deal a big blow to the market’s long-awaited recovery.

In Macau, VIP Flight Means Cash Crunch

China’s crackdown on capital flight has sparked a run on billions of dollars deposited with Macau’s junkets, raising serious questions about the potential scope of the market’s recovery from the coronavirus pandemic.

Reuters reports that an “unprecedented stampede” of high rollers to withdraw money has been under way since mid-summer, when the central government identified the cross-border flow of gambling funds, which it has long associated with capital flight, as a national security risk.

As part of the crackdown, officials also have said they are compiling a blacklist of foreign gaming jurisdictions from which Chinese nationals will be banned.

“The customer withdrawals have spilled into the broader casino industry,” Reuters reports, “leading to a cash crunch in Macau’s VIP sector at a time when the Chinese territory is struggling to recover from Covid-19 restrictions which have sent tourist numbers and gambling revenues plummeting.”

VIP, which is all but entirely bankrolled by the junkets, accounts for around 50 percent of gambling revenues market-wide, which last year totaled a world-leading US$36.5 billion. That’s fallen by around 90 percent since the pandemic hit in January and tourist travel to Macau from mainland China was effectively shut down.

As one casino executive noted, “This is not millions we are talking about being taken out here, but billions.”

Casinos have reacted by putting limits on the amount of cash chips that can be withdrawn, Reuters said. At some properties customers can now only withdraw HK$1 million (US$129,000) compared with HK$5 million in recent months, and only the account holder can withdraw. Any transaction over HK$200,000 is now being flagged, leading to people carrying around HK$5 million in chips in multiple sets of $10,000 to avoid detection.

“The crackdown on the cross-border transactions have finally rammed home the inconvenient fact that Macau has always been dependent on outflow of funds from the mainland,” said Ben Lee, founder and principal of Macau-based gaming consultancy IGamiX.

The junkets have been a mainstay of the Macau industry for their ability to recruit high rollers on the mainland, where casino marketing is prohibited, arrange for their travel and accommodations and other perks and bankroll their wagering in contravention of China’s strict currency controls.

With the growth of legal gambling across East and Southeast Asia over the last decade or so, their reach has extended from Macau to every corner of the region. Not surprisingly, it was Suncity Group, reputedly the largest of them, that found itself in Beijing’s crosshairs last summer as part of a related crackdown on online gambling and proxy gambling. Suncity has denied any wrongdoing, but the junkets, Suncity among them, also have been targeted by investigations in Australia into allegations of money-laundering and other illegal activities at gaming giant Crown Resorts.

Fears that Beijing is broadening the crackdown again appeared to lead to Suncity, whose VIP clubs were the focus of the initial run on casino funds, according to Reuters, which then exploded into a market-wide panic when Suncity began restricting withdrawals. Junket agents, in turn, have begun taking back deposits from the casinos.

In a recent client note, Credit Suisse analysts Kenneth Fong, Lok Kan Chan and Rebecca Law said Macau’s recovery may take longer than expected due to what it termed as the “structural pressure” being placed on the VIP system.

“Unlike in 2010-14, when the central government had targeted corruption, this time around Beijing is targeting gambling activities,” they wrote. “This hurts big players demand, affects junket debt collection and blocks funding channels for big players.”

As a result, they expect the VIP sector to “scale down over the next few years, dragging the pace of recovery.”

They believe this also will impact the upper levels of the mass market, the lucrative “premium mass,” as it’s known.

“Without a healthy VIP junket system, casinos would lose one of the key sources to grow their premium mass players, as these players lost one of their major channels to move money (approximately 30 percent of their gambling funds go through the VIP system).”

On a more positive note, China’s restoration of visas for individual tourist travel to Macau has boosted visitation by more than 200 percent from July to August.

The total for the month was 227,113, according to Macau government statistics. That’s down 93 percent from August 2019, but it’s a major improvement over the hundreds of visitors that were trickling in daily over the spring, when tourist visas were suspended and stringent pandemic-related controls, including mandatory quarantines, were in force on both sides of the border.

Analyst David Bain of Roth Capital Partners said visitor volume has improved to 15,000 per day from 10,000 per day a month ago, implying a monthly visitor volume run rate of 450,000 versus an average of approximately 3 million per month last year.

Gaming revenue in August totaled MOP1.33 billion (US$166.6 million), down 94.5 percent year on year, and operators and analysts alike now expect the bounce from the “Golden Week” holiday commencing October 1 will be more modest than they were hoping.

Ambrose So, chief executive of casino concession SJM Holdings, told Hong Kong media the holiday may generate only “30 to 35 percent” of the revenues seen in the same period a year ago.

Suncity boss Alvin Chau was similarly cautious, predicting revenue will come in at “20 percent to 30 percent.”

Looking longer term, the Credit Suisse group said Macau’s recovery will look very different market if it turns out operators will have to focus mainly on grind play.

“A base-mass-led recovery without any meaningful uptick in money spent would lower casinos’ profitability, and the new supply (three new projects in 2021) would take the market longer to absorb.