Insight MACAU
MACAU VIP COLLAPSE PROMPTS QUESTIONS OVER JUNKET SYSTEM
The collapse in Macau’s VIP revenue has been deeper and more prolonged than most analysts had foreseen, prompting questions as to what’s really behind the downturn and whether the junket system that fuelled explosive growth is still viable
Analysts are warning the days of rapid growth in the high rolling sector may be a thing of the past and see a flat outlook going into 2015. Gross gambling revenue has fallen in each of the past five months, with the 23.2 per cent October decline the worst on record. That was hit by a drop of about 37 per cent in VIP revenue, according to Wells Fargo Securities.
Aaron Fischer, a Hong Kong-based analyst with CLSA, says the VIP market in Macau may have reached a plateau after a decade of rapid growth, rising to become worth an estimated US$30 billion a year.
"No one ever expected the market to be this big. So the fact that the base has become so high it just makes it harder to grow at the same way it's been growing in the past," said Fischer.
A crackdown on corruption on Mainland China, coupled with a slowing Chinese economy, reports of a lack of liquidity among junkets, as well as high profile reports of money going missing have all taken their toll on the high roller segment.
But the extent of the downturn has left some questioning as to whether the problem is systemic.
“Funding and liquidity remains very tight, junkets are facing difficulty obtaining capital, and turning that capital, leading to weaker rolling volumes and margin pressure,” Standard Chartered analyst Philip Tulk said in a recent note, suggesting the system may be “near broken.”
“We see these issues persisting well into a China easing scenario.” Tulk told a recent panel session at the Macao Gaming Show that many of the junkets rely on high net worth individuals as a source of funds and several high profile cases of money disappearing from junket operators earlier this year has shaken faith in the business model, he said. “Until we see that confidence returning, we will not see a snap back.”
Fischer agreed the scandals earlier this year had undermined confidence. "That's resulted in some
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Aaron Fischer Hong-Kong- based Analyst, CLSA. This article first appeared in Asia Gambling Brief.
“The VIP market in Macau may have reached a plateau. No one ever expected the market to be this big. So the fact that the base has become so high it just makes it harder to grow at the same way it's been growing in the past. The junket scandals earlier this year have undermined confidence. That's resulted in some investors in other junkets pulling their funds out. There's been a drop in liquidity within the junket system as well.”
investors in other junkets pulling their funds out," he said. "There's been a drop in liquidity within the junket system as well," he said.
However, JPMorgan analyst DS Kim disagrees with the theory that a lack of liquidity is behind the problem. He argues that while in past downturns, liquidity issues with the junkets had been largely to blame, this time around there appears to be enough cash in the system.
He says some smaller junkets are experiencing issues, but nothing outside the realm of the normal and not enough to explain the magnitude of the collapse in VIP revenue.
“We believe this is more a demand side problem (players), rather than supply side (junket’s credit provision),” he said in a report.
Most analysts do agree that the biggest hit on the demand side has been China’s anti corruption drive, which has made anyone wary of any kind of “extravagant” behaviour that may put them on Beijing’s radar.
Hong Kong-based Nomura Asia analyst, Louise Cheung, in an interview with AGB said the VIP segment was set to "remain pressured for 2015," as the crackdown, now in its second year continues and becomes more entrenched. But she said there is hope of a recovery in the second half of next year.
"We do think that when you look at the anti- corruption policy that China is pushing out basically they are institutionalising it, so for us that means there’s going to be pressure," she said. "Basically that people stay away because of concerns over that [anti-corruption policy] they will probably never come back."
While Kim agrees the crackdown has caused “a lot of fear” in the market, he attempts to answer why revenue has fallen off so sharply only over the past few months, given the crackdown isn’t new.
He points out that recently, the anti-corruption drive has focused more directly on Guangdong province, with the announcement in June of an official investigation on Wan Qingliang, the then
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