Investors reeling from four straight months of gaming revenue declines in Macau took heart recently when China’s official Xinhua news agency cited a statement from the ruling Communist Party’s Politburo that a campaign to “clean up undesirable work styles such as formalism, bureaucracy, hedonism and extravagance” has “reached its goals”.
But Wells Fargo Securities was quick to respond with a client note claiming the “massline campaign” cited in the article refers to a specific bureaucratic campaign aimed to form closer links between officials and the public, “not the broader anti-corruption campaign.”
“Our China macro contacts confirm the announcement referred to a very specific anti-corruption program and not the broader anti-corruption drive that has been a cause of the slowdown in Asia luxury sales and Macau gaming,” analyst Cameron McKnight wrote.
Most observers blame Beijing’s corruption crackdown for the sharp decline in revenue from VIP gaming—the source of upwards of 65 percent of the casinos’ take—that has stymied growth market-wide.
Hoffman Ma, deputy chairman of casino operator Success Universe Group, said the anti-corruption measures have restricted large money transactions, making it harder for the junkets that recruit players and provide them credit to operate, and Daiwa Capital Markets reports that at least 15 of the territory’s registered junkets have quit the business so far this year, including Dore Holdings, once considered among the 10 biggest in the sector.
Earlier this year, a junket agent’s theft of around $1.3 billion from the Kimren Group caused skittish junket investors to pull their money out of other operators, creating additional pressures on an already tight credit market. Las Vegas Sands board member Jason Ader suggested the incident represented the junkets’ “Lehman Brothers moment,” referring to the 2008 collapse of the Wall Street investment bank after financial liquidity dried up.
Earlier this month, Deutsche Bank reported that the average period in which junkets could expect to collect payment of VIP gambling losses was now 25 days, significantly longer than the previous standard of between 10-15 days. This has created a ripple effect in which junkets have even less money on hand to extend to VIPs.
At the start of the year, before it became obvious that the VIP slowdown would be lasting longer than expected, many Macau casinos raised the monthly wagering minimum they expected their junket operators to generate by 50 percent. An unidentified junket operator told The Wall Street Journal that maintaining that was becoming “quite difficult”.
Another leading operator in the sector, HengSheng Group, is reportedly considering closing its VIP tables at Sands China’s Venetian and Cotai Central casinos. This spring, Sands China and other casino concessionaires began pressuring junket operators for more disclosure on their customers and agents, in part because of increased scrutiny from U.S. regulators.
McKnight, in the meantime, says the corruption crackdown on the mainland may even accelerate. “Many of the task forces set up to investigate potential corruption have yet to release their findings. When these task forces do report back, our contacts believe anti-corruption scrutiny may ramp even further.”
And CLSA Asia-Pacific Markets has added its voice to the chorus of dire expectations from analysts on revenue in 2014, lowering its earlier downsizing of 5 percent growth for the year to a 1 percent decline. The bank’s Hong Kong-based Aaron Fischer has also cut his 2015 growth estimate to 5 percent from 10 percent.
Macau casino operators are leading losses on Hong Kong’s Hang Seng Index this year, with both Sands China and Galaxy Entertainment Group tumbling more than 33 percent. Both stocks were among top performers on the gauge in the five years through December 31 of last year, data compiled by Bloomberg show.
Yet neither is considered a bargain in the current operating environment.
“They could fall further,” said Same Le Cornu of Macquarie Investment Management. “If they fall another 15-20 percent, we would be buying.”
