Professor: Junkets Undermined Macau

An expert from Macau Polytechnic Institute says Beijing’s crackdown on corruption was not the primary cause of the jurisdiction’s decline. Professor Zeng Zhonglu says the fault lies in Macau’s unregulated junket industry. It all started, he says, with the disappearance of one operator. At left, a VIP room at Galaxy Macau.

Revenue cascade continues

The dramatic decline in Macau’s gaming industry, which has seen revenues drop every month for 10 consecutive months, has repeatedly been blamed on the Chinese government’s crackdown on corruption, graft and money-laundering in the world’s No. 1 gaming destination.

At a recent seminar on gaming law, Professor Zeng Zhonglu of Macau Polytechnic Institute said the city’s unregulated junket business is the direct cause, and it all started with the disappearance of Huang Shan, formerly a major player in the junket trade.

According to the Macau Daily Times, the operator and his money dropped out of sight in April 2014. That precipitated a decline in funds lent to gamblers, and then to a drop in gaming revenue. The slide has continued unabated since last June.

“The capital Huang Shan swept away with him accounted for about 10 percent of the junket operators’ yearly rolling loan funds,” Zeng said. “The bigger impact of the incident is that it has shaken other investors’ confidence. Its impact on Macau’s junket industry is equivalent to the Lehman Brothers’ bankruptcy in the U.S.’s financial market.”

According to Zeng, Huang Shan’s disappearance undermined a business based on trust, and “put a stop to easily accessible loan funding, especially for the small and medium-sized VIP rooms.” He added that flimsy regulation of the business was a recipe for disaster.

“VIP rooms’ loose loaning policy has led to many bad debts, which are estimated to be as high as HKD100billion (US$13 billion). The VIP rooms’ excessive and easy lending has also led to more problem gamblers and pathological gamblers.”

Zeng said the casino industry in Macau is long overdue for reform, and the government should have acted much sooner to anticipate and head off the collapse by banning lending to local citizens; encouraging more mass-market gaming; and establishing a more secure credit system. “What’s more important is to strengthen the credit investigation on junket operators and their salesmen, as well as the borrowers. The key is to lend cautiously,” he said.

The Macau Business Daily reports that Zeng agrees with Chinese President Xi Jinping’s call for greater diversification in the market. But GGRAsia reports that analysts see cause for concern in the mass-market as well. “Demand for hotel rooms is declining,” according to a report from Morgan Stanley Asia Ltd. “The number of hotel guests fell by 9 percent year-on-year in the second month of 2015 despite price cuts, the first decline since 2009 without any incremental supply.”

And demand from high rollers “appears to be undergoing another leg down amid ever-strengthening anticorruption efforts,” said DS Kim of JP Morgan Chase & Co. Kim now forecasts a 23 percent decrease in Macau gaming revenue this year, down from his initial 18 percent prediction.

Though Galaxy reported disappointing first-quarter revenue from VIPs and mass-market players?down 41 percent and 16 percent respectively?the company issued a statement saying it “remains optimistic in the longer-term outlook for Macau.” The company is preparing to open its Cotai Strip resort next month.

According to government data, first quarter mass-market GGR in Macau dropped 27 percent year-on-year to approximately MOP27.11 billion (US$3.40 billion) and VIP baccarat fell 42.1 percent in the quarter to MOP37.67 billion ($US4.7 billion). On April 1, the Gaming Inspection and Coordination Bureau announced that overall GGR for the quarter was 36.6 percent lower than in the same period in 2014.

Despite the teetering market, MGM China CEO Grant Bowie says things will stabilize in the second half of 2015. He told the Macao Daily that the industry’s mass market will grow along with nongaming attractions, and Xi’s anti-graft measures ultimately will benefit the market.

Meanwhile, Macau’s Secretary for Economy and Finance Lionel Leong Vai Tac says the government will limit average annual growth rate of the city’s gaming tables to 3 percent, a policy he said “will be in place for 10 years from 2013.”

The city also has announced it will limit the number of visitors from Mainland China to 21 million or fewer per year.

“The proposed restrictions aren’t as bad as they appear,” according to a report in the Motley Fool. “Macau is already pivoting to a more global audience. This could just be another catalyst to force that change in the gaming industry.”