It’s no news that junkets are one of the most affected groups in the current gaming crisis as the damage is coming from all sides. High rollers sidestepping Macau because of Beijing’s anti-graft campaign, credit shortage in China or the several crackdowns launched by authorities. With no clients, no funding and a closer look by the authorities (from China to the US) some media are saying that the Macau junket model ‘is broken’.
If the lack of liquidity or the underperformance of the Chinese economy, however, are seen as major roles in the junket drama, investors are taking note of other factors playing a significant role. For example, the lower ‘quality’ of VIP players, meaning gamblers that bet less money and pay much later – with some not paying at all.
The first signs appeared when the almost perfect positive correlation between credit flow and junket revenues started to diverge. ‘Divergence between junket volume and credit growth suggests something else at play’, wrote Wells Fargo in a recent note to clients. In the last 30 months, the correlation between credit and junket volume in Macau tracked by the US bank stayed at 78 per cent. The high figure means that credit and junket revenues go hand in hand and in the same direction: when credit improves, the junket business grows and vice versa.
But in December, junket volume ‘significantly underperformed’ credit flows. The latter have been dropping by a rate of 10 per cent since the Summer, while the former registered a record decline of 44 per cent last month. ‘We believe Xi Jinping’s visit, the continued corruption crackdown, and worsening junket liquidity are pressuring volumes’, Wells Fargo said.
But that’s not all. The US bank also underline that ‘our prior checks suggested the general quality of VIP players has declined’. With some casinos moving mass premium gamblers to VIP rooms to avoid the smoking ban, these rooms are probably not exclusive to the high rollers anymore.
Business Daily reported recently that several junket companies are already selling property in Macau and this month Chinese media reported that 40 to 50 VIP rooms could shut their doors in the coming months. Macau gaming operators introduced more than 100 new VIP rooms in the last three years. In other words, in the near future Macau could lose half of the VIP rooms it has created since 2012.
To Wells Fargo, this wave of shutdowns ‘could represent a spiral of bad debt and slower payment cycles. Fewer capital turns result in less capital in the system, which leads to lower loan and VIP volumes. Credit losses further impair junkets’ lending capacity and market volume’. Morgan Stanley estimates that the repayment period to junkets more than doubled in 2014 from 15 to more than 30 days, while smaller junkets have been driven out of business already.