GGRAsia – New rules on junkets to trigger consolidation: analysts

New rules on junkets to trigger consolidation: analysts

Sep 23, 2015 Newsdesk Latest News, Macau, Top of the deck

The revision of junket regulation in Macau will intensify industry consolidation and, while it might weigh on the industry, it might also help restore the confidence within the sector, said several gaming analysts.

Macau’s casino regulator, the Gaming Inspection and Coordination Bureau, on Monday announced it would revise Administrative Regulation No. 6/2002, which regulates the conditions and procedures for issuing a licence to a gaming promoter, also known as a junket operator. The revision would focus on improving the transparency of the junket industry, said the gaming regulator.

“We believe the key is to improve the transparency of the industry, such that investors/agents can properly address the risks/rewards before they invest or work with the junket,” Credit Suisse AG said in a note on Tuesday. “With better disclosure, at least, investors/agents can know who is ultimately accountable for the funding, the financial performance of the junket, how much funding it has, etc,” said analysts Kenneth Fong and Isis Wong.

The planned regulatory revision announced on Monday will focus on new requirements regarding the capital and shareholding structure of junket operators, including tighter rules on accounting and auditing. There are also plans to make public more information about the gaming promoters, such as the names of directors, shareholders, key employees and collaborators, said the city’s gaming regulator.

On Tuesday, Macau’s Secretary for Economy and Finance, Lionel Leong Vai Tac, said the government would soon issue guidelines for more stringent monitoring of gaming promoters. If the guidelines prove to be effective for the evolution of the industry, the government might then embark on the longer process of revising related legislation, Mr Leong explained.

The Credit Suisse analysts said they believe the new regulation “will trigger further industry consolidation with bigger junkets which have stronger balance sheets, better systems and disclosures, and which are able to source more funding and at a lower cost of capital”.

As of July 2015, there were 182 licensed junkets in Macau, “just one less than the … 183 junket promoters [in the list] that was published in the official gazette on January 28,” the gaming regulator told GGRAsia in an email.

Brokerage Sanford C. Bernstein Ltd said in a note on Monday that, in the near-term, more scrutiny of junket promoters “may weigh further on VIP business” in Macau.

“We believe it will intensify the consolidation that is already taking place in the junket space. Junket promoters may also find it more difficult to raise capital from its traditional sources. A tightened scrutiny on junket’s financial matters may also reduce the risk exposure associated with side-betting which is often the direct cause of small junkets’ insolvency,” said the brokerage’s analysts Vitaly Umansky, Simon Zhang and Bo Wen.

“Long-term, a tighter government oversight can help restore the confidence and trust within junket space,” they added.

Dore incident

The announcement of more scrutiny of junkets comes on the heels of an alleged fraud that rocked the Macau VIP gambling segment a fortnight ago. Macau junket operator Dore Entertainment Co Ltd, which operates VIP facilities at Wynn Macau, stated it had been a victim of internal fraud by a former employee.

Wynn Macau’s operator, Wynn Macau Ltd, has said in a filing that Dore owes no money to the company and continues to operate in Wynn Macau.

In Monday’s note, Credit Suisse said several junkets it had spoken to “mentioned that they intentionally preserved capital immediately after the Dore incident just in case there were any capital withdrawals”. “This is because it would be very damaging if an agent could not get its money back and the news spread to the agent community,” said the analysts, adding that so far “the junkets noted limited outflows of money (mainly from small depositors)”.

According to Credit Suisse estimates, immediately after the Dore incident “the rolling volume of the industry fell by 25 percent to 30 percent starting September 10 (Thursday) as a result of junkets preserving capital and capital withdrawals”.

“The volume has since been gradually normalising. Over the past weekend (September 19-20), we estimate that the rolling volume was only around 10 percent to 15 percent lower than the normal weekend volume. We expect the situation to normalise by month end,” said Mr Fong and Ms Wong.

The analysts also noted that the announcement made by Macau’s gaming regulator does not mention limits to how a junket gets funding, background checks on depositors and funding sources.

“This is probably because the regulator is aware that even if it modifies the regulations, investors/agents can still find other ways to invest in the junket industry, such as personal loans, being a shareholder or other creative means,” said the Credit Suisse team. “Besides, it is the nature of the junket industry to involve credit extensions, deposits of working capital and players putting money with junkets,” it added.

Karen Tang of Deutsche Bank AG in Hong Kong said in a note issued on Wednesday that Macau’s current cycle of junket troubles began in April 2014, when a junket operator called Huang Shan – who had offered a high monthly dividend of 2.5 percent to junket investors in exchange for junket capital – fled with an amount reported to be as much as HKD10 billion (US$1.3 billion).

“After this junket agent ran away, other junket operators also tightened credit as they worried that their counterparties might have lost a lot of money to Mr Huang. The resultant tight liquidity had caused many small scale junket operators to close down VIP rooms. Since then, Macau’s VIP GGR [gross gaming revenue] had fallen by 60 percent, and overall GGR had fallen by 50 percent,” wrote Ms Tang.

(Updated at 11.05am, Sept 23)