Macau Business | January 2022
The latest arrests and closure of some VIP rooms might not exactly spell the final days of junket operators in Macau, which might still linger after a reset, but these might mean the recovery of the gaming industry back to the pre-pandemic level is almost impossible in the foreseeable future, if not entirely infeasible, say analysts
“Next year will, at least, not be worse than this year.” It was the remark made by junket operator Suncity Group boss Alvin Chau Cheok Wa two years ago as he looked forward to what fortune would bestow on his business in 2020 and beyond, after a slight decline of 3.4 per cent in the city’s gross gaming revenue in 2019. Little did he, or others in the industry and the community, know at the time, a great deal of economic and financial havoc would be caused by the COVID-19 outbreak — and there would be a series of incidents that would change the industry forever.
Starting with Mr. Chau’s fall from grace that has snowballed into the closure of a number of VIP rooms managed by junket operators across the city in the past few weeks, the sector seems to have finally run out of the luck it has enjoyed in the past few decades by enticing Mainland Chinese high-rollers to splurge on gaming tables in Macau, the sole place on Chinese soil that casino gambling is legal.
Following the arrest and detention of Mr. Chau among a group of 11 people in Macau in late November over alleged charges of money laundering and running an illegal gambling syndicate — shortly after the mainland Chinese city of Wenzhou issued a separate arrest warrant for him due to accusations of engaging in illicit cross-border and online gambling activities — all Suncity Group VIP rooms in the city, which numbered as many as 17 in the peak days, were closed on December 1. The disintegration of what analysts had described as the largest junket operator in Macau has sent shock waves across the industry: some of the six local gaming operators were reported to have ceased cooperation with all junket operators, also known as gaming promoters in the government’s terms.
Wynn Macau Ltd has confirmed the collaboration with all junkets had been terminated by the end of 2021, which would be “beneficial to the long-term and healthy development of Macau”, while Melco Resorts and Entertainment Ltd and Sands China Ltd are believed to have followed suit. Only SJM Holdings Ltd has so far indicated it would continue the cooperation with gaming promoters at least until the end of their current agreements.
Tak Chun Group, a major junket operator here, also remarked that some of its VIP rooms were closed because “individual casinos” had suspended their partnership. Macau Business has asked the regulator, Gaming Inspection and Coordination Bureau (DICJ), about the latest situation of the cooperation between gaming operators and promoters but did not receive a reply before press time.
Clear message and uncertainties
“We think the message from the government is clear, in that junkets’ proactive gambling promotion (such as credit extension, [foreign exchange] transfer, among others) for mainlanders will not be tolerated,” brokerage JP Morgan commented in a recent research note. “This will not only cripple junkets’ ability to bring VIP players (to any jurisdictions, including Macau), but also prompt casino operators to reconsider their relationship/association with junkets, in our view, especially into this critical license renewal period.”
A seasoned Macau junket investor and representative, Luiz Lam Kai Kuong, agrees the authorities did not have to issue any direct order for the six gaming operators, which would cease partnerships with gaming promoters on their own given the expiry of their gaming licenses by June 2022. “With their licenses up for renewal, as well as the dismal performance of the VIP sector in the past two years over the COVID-19 pandemic, it’s not difficult to understand why some gaming operators have decided to cease operation with junket operators to just be safe,” he says.
“They might resume the collaboration in the future if there are any changes, but they just want to avoid any risks at the moment with so much uncertainties,” the veteran adds, also referring to a recent verdict by the Court of Final Appeal that gaming operators sharing liability with gaming promoters on deposits in VIP rooms, which has also been reported as one of the major reasons behind the end of the partnerships between some operators and junkets.
The industry is now in the stage of “confusion and fear”, according to Mr. Lam remarks: “What the government should do is to come clean about what junket operators are allowed to do and what activities are deemed illegal. As long as we know clearly about the red tape, we could avoid any illicit acts.”
In the wake of the junket turmoil in recent weeks, Chief Executive Ho Iat Seng only spoke publicly in late December that the authorities had “no interference” in the collaboration between gaming operators and promoters, pointing out that local laws do not require gaming concessionaires and sub-concessionaires to have junket VIP rooms. Another official, Secretary for Economy and Finance Lei Wai Nong, also commented in late December that local junket operators could continue to operate should they abide by Macau regulations and respect the rules of other jurisdictions.
A revision of the criminal law in Mainland China, which has come into force since March 2021, has been regarded as a game-changer from the perspective of industry observers. The latest amendments create a new offence for any individuals who “organise” trips for the mainlanders to participate in gambling activities abroad, as well as bolstering the penalties like a prison term between five and 10 years (For more details, see another story about an academic paper written by a mainland legal scholar-cum-prosecutor).
Turmoil that was years in the making
Though the collapse of the junket system has only accelerated in the past few weeks, the beginning of the clampdown on the segment could date back to more than a few years ago. Since the mainland introduced an anti-corruption drive and strengthened efforts in reining in the capital outflows from the country, coupled with heightened oversight throughout the years, the junket segment has steadily shrunk. The number of licensed individual and corporate junkets totaled only 85 in early 2021, decreasing by 10 from the previous year and extending the annual decline to the eighth consecutive year from 2013, when a total of 235 gaming promoters were recorded, the DICJ data showed.
And the recent series of incidents make one wonder whether the local junket system, first created in the 1980s during the gaming monopoly held by the late tycoon Stanley Ho Hung Sun, still has a future here. In the views of Davis Fong Ka Chio, local junkets have to adjust their business model.
“Before the handover [in 1999], local junket operators used to fetch high rollers from Japan, Malaysia, Thailand and other Southeast Asian nations to gamble in Macau,” the Director of Institute for the Study of Commercial Gaming at the University of Macau (UM) says. “In face of the changes [in the mainland] now, they could target the Southeast Asian market again, as well as the nearby Hong Kong market.”
A former legislator, Mr. Fong does not think VIP rooms will become extinct in Macau over the recent changes, as the gaming industry has to provide different offerings to different segments of patrons. “The VIP rooms directly managed by gaming operators themselves will at least continue,” he adds.
Another scholar from UM, Ricardo Chi Sen Siu, believes that the local junket system could go on but that an overhaul is needed. The associate professor of business economics with research interests in gaming and tourism says the system going forward might mirror the International Market Agent (IMA) system in Singapore, in which the agents could also organise trips for high-rollers to play at casinos and extend them credit in exchange for a commission but they are more heavily regulated and vetted than junket operators in Macau. “They would simply become gaming [marketing] agents that bring in patrons for casinos rather than being involved in running VIP rooms,” he adds.
Despite its little coverage about junket operators, the recently published report on the public consultation about the local gaming regime undertaken between September and October 2021 pointed out that the vetting mechanism on gaming concessionaires and promoters would be strengthened in the future.
Zeng Zhonglu, professor at the Centre for Gaming and Tourism Studies of Macau Polytechnic Institute, also thinks gaming promoters could cater their services to patrons from other jurisdictions except the mainland, as it is impossible to do so now across the border.
“Given the efforts by the central government in cracking down on cross-border gambling activities in recent years, as well as the pandemic, the local junket activities have already declined before the latest incidents,” Professor Zen adds. “Thus, the closure of VIP rooms might not have a huge impact on the local gaming performance in the short-run but it will severely affect the gaming revenue and other related sectors like high-end retail and hoteling in the long-run.”
“The local gaming industry will continue heading toward the direction of healthy and stable development but it’s just extremely difficult for the sector now to be back to the pre-pandemic level,” he continues, referring to the gross gaming revenue of MOP292.46 billion in 2019.
Though the share of mass market in the overall gaming revenue has been on a constant hike from less than 30 per cent in the early 2010s to 53.8 per cent in 2019 to 65.2 per cent in the first three quarters of 2021, the rise is more about the plunge in VIP revenue, which was generated mostly by junkets except 10-20 per cent coming from the VIP rooms directly managed by gaming operators, as analysts pinpoint. Making up as much as over 70 per cent of Macau’s gross gaming revenue and generating over MOP200 billion a year in the early 2010s, VIP revenue declined to just 46.2 per cent in 2019, when VIP revenue totaled MOP135.23 billion, the DICJ data said.
Brokerage Sanford C. Bernstein estimated in a recent research note that, amid the absence of junket operators, between 15 per cent and 30 per cent of junket VIP business would shift back to premium mass and direct VIP by gaming operators. But gaming revenue would likely only resume to account for 69 per cent and 79 per cent of the 2019 level — or between MOP201.8 billion and MOP231 billion — in the post-recovery era based on the current fundamentals, the investment bank added.
Professor Siu of UM also acknowledges that it’s “difficult” for the industry to post the 2019 results again, let alone the peak of MOP360.75 billion that it reached in 2013, with little or no contributions from junket operators. “No one could be certain what will happen, but I don’t see this will occur at least in the next five years,” he says. “The community needs to manage their expectations for gaming revenue.”
Shortfall in finance
The fall in gaming revenue has an underlying impact for local public finances, which rely on gaming tax receipts that account for about 70-80 per cent of the total government revenue. Currently, the direct tax on the gross gaming revenue of Macau casinos stands at a rate of 35 per cent, but there are other levies on casino gaming for the purposes of public welfare and social and cultural affairs, making the total tax rate on casino gaming 39 per cent.
Due to the annual government expenses averaging MOP100 billion a year in recent times, analysts pinpoint that Macau’s annual gaming revenue has to reach at least MOP200 billion a year for a balanced budget should the current conditions remain unchanged. For instance, the 2022 government budget forecasts that gross gaming revenue would reach MOP130 billion this year and that MOP30.34 billion has to be taken out from the fiscal reserve again for a balanced budget.
The authorities have forked out about MOP100 billion from the fiscal reserve, which still had MOP650 billion as of September 2021, in the past two years for supporting public finances. “What Macau could do is to expedite non-gaming development,” says Professor Zeng of the Macau Polytechnic Institute.
Asked about the impact of the declining junket segment in gaming revenue and public finances, the city’s CE, Mr. Ho, noted in late December that the target of MOP130 billion in gaming revenue in 2022 could be reached should the pandemic situation remain stable in the upcoming 12 months. The latest DICJ data show that the territory’s casinos raked in MOP78.9 billion in revenue in the first 11 months of 2021, up by 49.9 per cent year-on-year but only representing 60.7 per cent of the MOP130 billion target.
Professor Siu also believes that the MOP130 billion target for 2022 is feasible even when the junket sector has little or even no contributions to gaming revenue. “Part of the junket VIP revenue will shift to the premium mass segment or the VIP rooms directly managed by the gaming operators,” he says.
“As it is also likely that part of the traffic between Hong Kong and Macau will resume [in 2022], the Hong Kong market, which contributed to about 20 per cent of the gross gaming revenue in the pre-pandemic times, could have a positive impact on the gaming industry as long as the pandemic situation remains stable,” he continues. Since the onset of the coronavirus outbreak two years ago, the city has only remained in a quarantine-free travel arrangement with the mainland.
In the meantime, the junket sector is just waiting to see what lies ahead for it. “We will comply with what the government asks us to do,” says Mr. Lam, a veteran junket investor. “Even if the government says it’s the end for us, we could do nothing but just accept it.”
The entire Macau gaming industry, from casino operators to junket operators, has to rethink its ways in approaching the mainland Chinese market, following the implementation of the latest amendments to the criminal law across the border, says a legal scholar and prosecutor in the mainland.
The remarks were made by Zhang Guoxuan, deputy prosecutor-general at the Procuratorate of the Chinese southeastern province of Jiangxi, in his academic paper titled “The Specific Application of Cross-Border Gambling Crimes in the Mainland and Its Impact on Macau’s Gambling Industry”. The paper is part of the second issue of the 2021 edition of Global Gaming and Tourism Research, an academic journal published by the Macau Polytechnic Institute.
Mr. Zhang points out in the paper that the latest version of the criminal law, which came into force in March 2021, specifically creates a new offence applicable to any party that “organises” mainland residents to participate in gambling abroad, in addition to the existing two offences of making profits by involving oneself in gambling activities and opening casinos. “[The addition of new offences] signals the expansion of the jurisdiction from simply within [Mainland China] to beyond the mainland,” he writes.
“The ways for the mainland in determining cross-border gambling crimes are based on the mainland’s laws and legal interpretations, unaffected by the laws and rules of Macau,” the legal professional stresses. “Investors and operators in the Macau gaming industry should have a clear grasp of the changes in the laws and rules in the mainland, and adjust promptly their business strategies and models for the new environment.”
Individuals not companies
The paper, for instance, illustrates the past practices for junket operators — who are known as gaming operators in the government’s terms — to entice patrons in the mainland “are not feasible anymore.”
“Some gaming entities in the past set up representative offices in the mainland to entice more mainland patrons,” he continues. “This practice obviously violates the rules and laws now on the books.”
“It’s also very unlikely or even not possible for gaming promoters or operators in Macau to collect back the debts from the mainland patrons [after extending credits to them],” the paper says. Though there were successful cases in the past for Macau gaming entities to collect back debts from patrons through the mainland court as they had proven they did not know the patrons would use the credits for gambling purposes, he believes the possibility is now “close to zero” for gaming entities to win a court case due to the new rules.
Mr. Zhang also points out the offenders of these gambling-related crimes in the mainland could only be individuals but not companies or entities. “Concerning the crimes committed by entities, [the mainland] will only hold the heads or other persons-in-charge [of the entities] accountable,” he explains.
“The perpetrators must be organisers rather than participants in general, who play a key role in planning, decision-making, leadership and command of cross-border gambling activities,” the paper adds.