In the midst of seven consecutive months of year-on-year revenue declines, Macau’s punch-drunk casino market was bracing last week for a three-day state visit by Chinese President and Communist Party chief Xi Jinping, the driving force behind an aggressive crackdown on high-level corruption that is blamed for much of the industry’s woes.
Investment analysts expect December revenues will be down around 25% or more from 2013, and the consensus now is that the slump could last six months or more before the market starts to recover with the opening of the first new resorts on Cotai, hopefully spurring fresh demand, and Beijing—hopefully—eases up on the anti-corruption campaign.
There are as yet no signs of the latter, however. If anything, Xi is casting the net wider to address China’s more recent and very serious concerns about capital flight, which appears to have landed the casinos firmly in the crosshairs and with them their partners in the shadowy junket system that controls the VIP trade which generates two-thirds of Macau’s world-leading gaming revenues.
High-ranking mainland officials also have been warning the city in increasingly stern language to wean itself away from its dependence on the casinos whose taxes generate 80 percent of the government’s annual revenues.
Last week, the South China Morning Post reported that the Economic Crimes Investigation Bureau of China’s Ministry of Public Security is leading an investigation into illicit money flows through the city. The newspaper said the bureau has sent representatives to meet with local regulators and law enforcement agencies to discuss “criminal activities” involving the mainland’s popular state-backed UnionPay bank card, reportedly a major resource for visitors from China to evade their country’s strict limits on yuan exports through activities such as bogus purchases of jewelry, watches and other high-priced goods, many conducted on smuggled point-of-sale devices.
Beijing also has been moving forcefully to secure the return of corrupt party and corporate officials who have fled overseas with money illegally funneled out of the country, and the Public Security Ministry has met with representatives from 18 provinces and cities to discuss steps to crack down on money laundering related to gambling overseas, according to news reports.
The Post, meanwhile, has cited documents indicating that Macau’s Monetary Authority has summoned top bankers in the city to a meeting next month as part of the crackdown. The regulators told the bankers they would “explain a live monitoring system” which will give Beijing unprecedented access to all transfers through UnionPay.
The casinos will be affected “potentially profoundly, depending on the extent to which this is enforced,” Standard Chartered analyst Philip Tulk told Bloomberg.
“The sector will be under great pressure going forward,” Lantis Li, an analyst at Capital Securities Corp., said.
Tulk has characterized the junket system, for all intents and purposes a vast underground banking network handling billions in high-roller transactions through its control of VIP credit and collection, as “near broken.” It’s an assessment borne out not only by Beijing’s actions but by law enforcement in Hong Kong, which last year jailed a prominent investor in the system convicted on money laundering charges and is currently targeting a former major stakeholder in the Neptune/Guangdong Group, one of the five largest junkets in Macau, on suspicion of money laundering. Hong Kong authorities have frozen the assets of Cheung Chi Tai and seven of his companies as part of the latter probe, a move expected to further dampen the flow of credit into the system, which is already struggling with slowing economic growth and declining property values in mainland China and which are crimping credit and forcing smaller junkets to fold.
“Based on our conversations with industry participants (Neptune) itself has an intricate shareholding/ownership structure (which varies depending on property and VIP rooms) so it is very difficult to determine which part of the business will be affected by this (money-laundering probe),” analysts with Daiwa Securities wrote.
What is known about Cheung is that he was identified in a U.S. Senate report of several years back as a high-ranking triad figure. He also has been tied to an alleged World Cup gambling ring that was busted in Las Vegas this summer. Eight people were arrested in the case, five of whom have pled guilty, and federal authorities claim to have computer and phone records seized from the operation which indicate, they say, that Cheung’s companies were helping the ring settle up with gamblers.
Other factors are battering Macau as well, and they’re combining within the context of the anti-corruption drive to also cool what was previously a red-hot mass market. These include a tightening of existing restrictions on mainland travelers accustomed to abusing third-country visas to increase the frequency of their visits to Macau and lengthen their stays and a smoking ban on all public gaming floors that went into effect on October 6.
Unofficial checks from the first couple of weeks in December have shown the market as a whole down around 30 percent year on year.
The Credit Suisse team of Kenneth Fong and Isis Wong said the industry’s take was tracking through December 14 at a 29 to 31 percent drop, and Cameron McKnight of Wells Fargo Securities said Xi’s visit “could further pressure the monthly result”.
“We see the potential for further downside risk to our below-consensus fourth-quarter Macau company estimates,” he said. “We estimate December Macau gaming revenue growth of minus-30 percent versus our prior minus-23 percent to minus-27 percent estimate.”
Japanese finance house Nomura said the softness “is likely to continue until security eases again, which is probably early next week,” after Xi’s visit.
“We model Macau’s daily GGR for the remainder of December to be MOP650 million to MOP750 million, implying a decrease of 30 percent to 35 percent, or MOP21.6 billion to MOP23.3 billion,” Nomura said.
