Bumpy road

More hurdles await for local junket operators from the sluggish post-Covid recovery to mainland China’s new criminalisation law and the development of digital yuan

Despite a mix of opinions whether Macau is covered by the recent criminalisation in Mainland China of any party assisting in cross-border gambling, the message is clear enough for the local gaming industry, in particular the VIP segment: the shake-up continues.

This new amendment to the criminal law in the mainland, coming into force on 1 March, bans anyone — namely, casino operators, holders, investors, as well as those hired or commissioned by them — organises or solicits mainland Chinese citizens to “gamble outside [the country’s] borders”. Weeks after the implementation of the new law, there is still no certainty about the status of Macau — which is a special administrative region of China but travelling to the city is regarded as cross-border tourism in the perspective of the central government — or what Sands China Ltd President Wilfred Wong has described as “ambiguity” in a conference call earlier this year with analysts.

Nonetheless, local stakeholders have adopted a rather prudent approach when officials from the Central Government have pledged the strictest measures to eradicate activities of cross-border gambling. Gaming operators, such as Wynn Macau Ltd, MGM China Holdings Ltd and Melco Resorts and Entertainment Ltd, have reportedly suspended their customer services in the mainland or tried to avoid the collocation of their mainland operation with gaming and casinos. Junket operators, which help casinos entice big spenders and lend them credits that will be settled later, have also followed suit.

“We still do not know the scope and extent of this new criminal code… a question that scholars probably don’t have an answer too,” says veteran junket investor Luiz Lam Kai Kuong. “Without any clear information [whether gambling in Macau is covered by law] we will just wait and see without making any move.”

MOP9.13 billion
– VIP Revenue in 1Q21

Stagnation

In addition to this new code, other regulatory hurdles like the Central Government’s attempt to control the outflow of capital from the mainland have further dampened the performance of the VIP gaming sector amid the Covid-19 pandemic. “With the start of the return of travellers the performance of the mass market [in casinos] has started to improve but the performance of the VIP segment has remained stagnant,” he illustrates.

Albeit just about less than one-third of the pre-pandemic volume, the visitor arrivals to the city have reached the highest level in recent weeks since the onset of the coronavirus outbreak earlier last year. In light of an improved tourism market, the Macau gross gaming revenue, according to latest data from the Gaming Inspection and Coordination Bureau (DICJ), hit MOP8.31 billion (US$1.04 billion) in March, expanding 58 per cent year-on-year to the highest monthly tally since January 2020.

A further breakdown of the DICJ data also show the mass market gaming revenue, including slot machines, reached MOP14.51 billion in the first quarter of this year, up by 2.1 per cent from the previous quarter but down by 7.4 per cent from the previous year, while the VIP revenue only amounted to MOP9.13 billion in the January-March period of 2021, surging 19.7 per cent quarter-to-quarter but plunging 38.3 per cent year-on-year.

“Accompanied by the start of the Covid-19 vaccination campaign here and the rebound of visitor arrivals, the revenue in the mass market has started to recover. The share of the mass market [in the gaming market] will further rise as more travellers return to Macau,” says Kwok Chi Chung, president of the Macau Association of Gaming and Entertainment Promoters.

While the overall gaming revenue might resume the pre-pandemic volume driven by the mass market, the executive of the junket trade body is more sceptical whether the VIP segment could resume the 2019 level, totalling MOP135.23 billion a year, over greater scrutiny. “The new criminal code rolled out by the mainland authorities has further dampened the business environment of junket operators,” Mr. Kwok says, sharing a similar perspective as other industry veterans.


“We still do not know the scope and extent of this new criminal code… Without any clear information [whether gambling in Macau is covered by law] we will just wait and see without making any move,” says junket investor Luiz Lam

Dwindling figures

In the first quarter of 2021 alone, the VIP sector made up 38.6 per cent of gross gaming revenue while 61.4 per cent for mass gaming, compared with a share of 46.2 per cent for the VIP segment versus 53.8 per cent for mass gaming in 2019. Brokerage Morgan Stanley has remarked in a recent research note about the regulatory headwinds against the VIP sector: “We expect VIP to contribute around 25 per cent of total GGR [gross gaming revenue] in 2021 and beyond. This compares with 70 per cent in 2012. With VIP being de-emphasized, we are looking at mass revenue, which has been on a structural growth path.”

The segment has indeed been embroiled in turmoil for years over the nation’s greater scrutiny on gambling and capital flows, as well as an anti-corruption campaign, since President Xi Jinping swept to power in late 2012. The operators with less financial power and a smaller scale have been gradually phased out.

The number of licensed individual or corporate junkets, or so-called ‘gaming promoters’ in the government terms, totalled 85 earlier this year, down by 10 from 2020, DICJ data show. The latest fall also marked the eighth consecutive annual decline since 2013, when a total of 235 gaming promoters were recorded. Secretary for Economy and Finance Lei Wai Nong has also stated earlier this year these junket operators in the city managed about 77 gaming rooms and 1,566 gaming tables — or one-fourth of the tables in the market — at the moment.

In view of the continuity of the negative impact induced by the pandemic and other regulatory hassles, Mr. Kwok believes the shuffle in the sector might continue. “There might only be some large junkets left in the future [should the headwinds continue],” he adds.


“There might only be some large junkets left in the future [should the headwinds continue],” says Kwok Chi Chung, president of the Macau Association of Gaming and Entertainment Promoters.

Digital yuan

Besides the criminalisation code, another new hurdle for the segment looming over is the possible introduction of digital yuan in the city. Since the People’s Bank of China (PBOC) announced last year it has started pilot tests for the sovereignty digital currency — Digital Currency Electronic Payment (DCEP) —  Macau has been flagged as one of the possibilities for pilot tests.

In the latest session with the Legislative Assembly in April, Macau Chief Executive Ho Iat Seng confirmed the local authorities are working with PBOC about the feasibility of adopting the digital yuan here, adding the city also plans to amend its regulations on digital currencies. Incorporating artificial intelligence and big data, the digital yuan could be more effective in efforts “against money laundering, terrorism financing and tax evasion”, the Chief Executive added.

Rob Goldsteinan, Chairman and CEO of Las Vegas Sands, regards the digital yuan as “an additional form of liquidity into the market” and “a very positive thing for the Macau market”. “I know the common wisdom is that it’s going to be turbulent but I don’t want people thinking that way,” said the executive of the parent firm of Sands China in a conference with analysts in April. “We shouldn’t only be concerned – our business is not built on money laundering or on a necessary junket profile.”

But the same thing could not be said for junket operators, as the digital yuan would allow Beijing to better trace and oversee how money is put into use in the gambling enclave. Brokerage Sanford C. Bernstein highlighted in a research note earlier this year that the DCEP would deal a huge blow to the VIP segment. “[I]t would also allow easier money transfer, [and] eliminate the need to use intermediaries (like junkets, underground banks or pawnshops),” the report read.

“The ecosystem of the Macau gaming industry has long changed — from the strengthening efforts by Mainland China against cross-border gambling in recent years to the new criminal law this March,” says Zeng Zhonglu, a professor at the Centre for Gaming and Tourism Studies of Macau Polytechnic Institute. “These all have deterred high rollers from coming to Macau; the digital yuan will only further deteriorate the VIP segment.”

In the perspective of the gaming scholar, the scope of the impact of the digital yuan depends on whether the virtual currency is the only avenue for the mainlanders to access to gambling chips. “Even if the digital yuan is introduced here, there will still be a long time when gamblers could opt for either the physical or digital currency,” he adds.


“The ecosystem of the Macau gaming industry has long changed — from the strengthening efforts by Mainland China against cross-border gambling in recent years to the new criminal law this March,” says Zeng Zhonglu, a professor at the Centre for Gaming and Tourism Studies of Macau Polytechnic Institute.

Venturing out

But junket operators do not take time for granted. Amid the deteriorating business environment, many major players have diversified their business empires, from investing in gaming operations overseas like Southeast Asian countries to tapping into the mass market and other tourism businesses. Alvin Chau Cheok Wa, boss of Suncity Group, one of the largest casino middlemen here, has been involved in the development and operation of integrated resorts in Vietnam, the Philippines and Russia in recent years with an aim of getting one of the three gaming licenses in Japan. Another junket boss Levo Chan Weng Lin of Tak Chun Group acquired about one-third of interests in Hong Kong-listed Macau Legend Development Ltd last year, which runs the entertainment and gaming complex Macau Fisherman’s Wharf on the Macau Peninsula.

“Subject to heavy regulatory pressure, the junket operators have been transforming their business models,” says Mr. Lam, the veteran junket investor. As the city’s six gaming licenses will expire next year, he adds: “There will be no surprises some junket operators might bid for a license during the renewal process, either by their own or through collaboration.”

Albeit the efforts by the authorities in clamping down the segment, he believes junket operators could still stay in business in the future. “Junkets have been crucial to the success of the [Macau] gaming industry throughout the years,” he adds.