Macau casino shares fell in Hong Kong after Deutsche Bank AG said gaming revenue was hurt last week due to a move by junket operators to reduce credit offered to high-end gamblers.
Gross gaming revenue fell 19 per cent to MOP493 million (US$62 million) a day last week, or 18 per cent below the average so far this quarter, Deutsche Bank AG analyst Karen Tang wrote in a note on Wednesday.
Junket operators reduced lending following the reported theft at a competitor “prompted others to withdraw deposits from various junkets,” Tang wrote.
MGM China Holdings Ltd. fell 7.7 per cent to HK$10.30 by the close of trading in Hong Kong, while Wynn Macau Ltd. fell 5.6 per cent. and Galaxy Entertainment Group Ltd. was down 5 per cent, SJM Holdings Ltd. dropped 5.8 per cent and Sands China Ltd. lost 2.9 per cent. The Bloomberg Intelligence Macau Gaming Index declined more than 5 per cent to a three-year low.
Dore Entertainment, which operates in a Wynn Macau casino, said last week that an employee is suspected of stealing HK$100 million from it. Police said thirty people have filed complaints that they were cheated out of funds amounting to HK$330 million, excluding the junket’s portion.
Stricter rules
The healthy operation of junkets is crucial to Macau’s gaming sector and it’s “necessary to review and improve the rules,” the city’s Secretary for Economy and Finance Lionel Leong said on Tuesday.
In response to the Dore incident, the Gaming Inspection and Co-ordination Bureau (DICJ), the regulator of Macau’s gaming industry, stated its intention to revise the regulations of the junket business.
The revision would focus on increasing transparency of the junket industry, mainly in two ways. Firstly, new requirements for junket operations including capital requirement, shareholding, collateral, audit and submission of financial statements. Secondly, additional disclosure of information on key parties, including directors, shareholders, key management and partners.
In addition, the DICJ reiterated that the current regulations require shareholders of junket operators with stakes exceeding 5 per cent to disclose their interest and personal details to the DICJ.
Still manageable
According to Credit Suisse, several junket operators they have spoken to over the past few days mentioned that they intentionally preserved capital immediately after the Dore incident 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 through the agent community. So far, the junkets note limited outflows of money, mainly from small depositors, according to research analysts Kenneth Fong and Isis Wong.
In addition, the Credit Suisse analysts pointed out that the DICJ statement following the Dore case mentioned nothing about limiting how a junket gets funding, background checks on depositors and funding sources, etc.
“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,” wrote the analysts. “Besides, it is the nature of the junket industry to involve credit extensions, deposits of working capital and players putting money with junkets.”
Further consolidation
Right after the Dore incident, Credit Suisse analysts gathered information indicating that the rolling volume of the industry had fallen by 25 to 30 per cent starting last Thursday as a result of junkets preserving capital and capital withdrawals.
But volume has since been gradually normalising. During the weekend, the analysts estimate that the rolling volume was only around10 to 15 per cent lower than normal weekend volume and that they expect the situation to normalise by month’s end.
“Going forward, we 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,” said the Credit Suisse analysts in their Tuesday note.
In addition, DS Kim, an analyst at JP Morgan Chase & Co., said in a note on Tuesday “if tighter junket regulations are adopted, we think the negative initial impact on VIP volumes would be inevitable, driven by the likely acceleration of junket room closures.”
Further downside in Macau stocks should be “fairly limited”, however, as the VIP segment is no longer a profit driver for the city’s casinos, he added.
Hopeful October
While based on channel checks through the weekend, Wells Fargo Securities estimates September Macau gaming revenues will decline by around 30 per cent. Checks suggest average daily revenue was around MOP550 million to MOP600 million last week, in comparison to MOP607 million in the prior week and August’s average daily revenue of MOP601 million, according to Wells Fargo Securities. The sequential decline was primarily due to the tightening of liquidity driven by the Dore junket theft, and low VIP win rate.
“We remain on the sidelines on the Macau gaming names as estimates and valuations adjust to a ‘new normal’ of tighter government oversight, a recovery that is likely to be flatter than prior rebounds and a weak Chinese economy” wrote senior analyst Cameron McKnight, “all of which are contributing to more muted revenue growth in Macau.”
However, with China’s Golden Week holiday less than two weeks away, the Wells Fargo Securities analyst says junket operators “seem incrementally more optimistic heading into October”.
with Bloomberg
