Macau stocks slumped last week, losing from 4 percent to 8 percent of their values as concerns over the reliability of junket operators and the viability of cash transfers from Mainland China were raised.
A shareholder in a relatively minor Macau junket promoter is reported to have disappeared with somewhere between HK$8 billion and $10 billion (US$1 billion-$1.25 billion) in investors’ money.
Credit Suisse has identified the individual as Huang Shan, a stakeholder in Kimren, or Jin Lin, as it’s also known, which operates in VIP rooms at MGM, Altira and Starworld.
Huang disappeared with the money on April 19, and according to industry sources cited in news reports, the funds were most likely sourced from investors actively involved in side-betting.
The incident, together with the recent arrest in Hong Kong of the wife of a shareholder in major junket promoter Neptune, is expected to have little effect on casino earnings but could dampen market sentiment toward the high-roller sector, which accounts for two-thirds of revenues in the $45 billion-plus market, the largest in the world.
The Neptune case is reported to be tied to an investigation into money-laundering.
For Credit Suisse, the loss from the junkets’ working capital pool and, more importantly, the impact on sentiment may slow down the velocity of capital and hence the VIP business.
“The potential deceleration in VIP GGR growth in the near term is likely to cap the share price performance, a scenario similar to 2012. Therefore, we suggest waiting for a better entry point,” the bank said.
Also last week, the South China Morning Post published a story entitled, “Mainland crackdown on illegal use of payment cards in Macau casinos,” alleging that Union Pay, the principal method of payment for Chinese citizens, was tightening restrictions on money transfers in Macau.
The South China Morning Post reported that UnionPay is imposing a series of measures in a “committed” drive to “combat overseas money laundering, capital flight and other illegal bank card use” in the booming casino enclave.
Gaming insiders and security sources in Macau told the newspaper that the anti-corruption drive launched by President Xi Jinping is zeroing in on transactions processed on hundreds of illegal hand-held card-swiping devices that have poured into Macau illegally. Analysts say the amounts involved could have totaled more than RMB40 billion (US$6.4 billion) last year alone, effectively circumventing a law that prohibits Chinese citizens from taking out of the country more than the equivalent in renminbi of US$50,000 over a 12-month period.
A Macau consultant familiar with the city’s ubiquitous pawn shops estimated RMB200 billion in transactions are conducted in Macau each year through UnionPay cards, around 20 percent of them through mobile devices.
“Otherwise, mainland gamblers cannot get enough money to gamble,” said John Bruce, Macau director of risk consultancy Hill & Associates.
The devices also are used to evade tax on the mainland, which is why they require authorization for use there.
The Macau government called the use of the devices “sporadic” and says they “were dealt with by police.” The central government, however, believes the problem has reached such dimensions that it can no longer be ignored.
The phenomenon also hints at the scale at which actual gaming revenue is being under-reported. Officially, Macau’s casinos booked US$45 billion last year, but the real number may be as much as twice that.
In any event, the crackdown will come as welcome news to the pawn shops, which flourish by allowing mainland gamblers to put expensive retail purchases on their cards, which they then sell back to the shops for cash, minus a commission.
The Macau General Chamber of Pawnbrokers figures the illicit swipe trade has caused their business to fall as much as 40 percent.
“We want the government to take enforcement action to combat such illegal transactions and set up a new law if necessary,” said the group’s president, Chou Chin Leong.
David Bain of Sterne Agee called the Morning Post story “sensationalized.”
“There is no new regulation from UnionPay, and the targeted segment for regulation strengthening (cross-border point-of-sale relocating) represents a minor form of patron UnionPay cash access,” Bain wrote in a note to investors. “We believe cash withdraws utilizing UnionPay account for 13 percent to 15 percent of GGR, though the primary—by a very large margin—utilization of UnionPay to access funds is within pawn shops owned by Macau locals and located throughout Macau streets and certain casinos. Returning items is not illegal and we do not believe it is realistic to make it so.”
Bain explains that Union Pay recently held a training session to prevent point-of-sale relocating and money laundering, but that this session was simply a explanation of existing rules.
“This is not a new regulation,” Bain explained. “UnionPay states that ensuring UnionPay card cross-border security “has always been one of the key tasks of UnionPay.” Our understanding from Macau contacts is that these types of transactions have been targeted previously and from time-to-time there are convictions of proprietors using Mainland point of sale devices in Macau stores. While a tighter focus on cross-border point-of-sale relocating could result in additional targeting, our contacts suggest—and we agree—it is very doubtful we see a noticeable disruption to mass GGR from this.”
Beijing is also reported to be cracking down on travelers using third-country visas to bypass limits on outbound travel to make more trips to Macau than allowed under the Individual Visit Scheme or tour group process
Because both Macau and Hong Kong allow entry for transit reasons for any passport holder with a valid third-country visa, Chinese nationals are able to use travel agencies on the China side of the borders to buy electronic flight tickets and visas for a small fee and then have the tickets canceled on the SAR side without actually traveling to the third country. In theory this could allow as many as four times more visits to either city over a three-month period than normal channels permit.
“We believe this method of visiting Macau has been in use at least since the handover of Macau to China in 1999,” says Union Gaming Research Macau. “As such, this practice is well known and has become a more common practice over the last few years.”
It also was the subject of a recent expose on China’s state-run CCTV, suggesting the government plans to rein it in, and the Secretariat for Security has indicated that tightening measures could be introduced this summer.
UGRM believes 11 percent of visitation to Macau could be at risk temporarily, although the actual impact, if any, would be “significantly lower.”
