Macau: The end of the junket model as we know it?
The future of the Macau junket market has dominated the gambling industry headlines following the recent arrest of Suncity Group Chief Executive Alvin Chau over alleged links to cross-border gambling.
The junket giant closed all of its VIP gambling rooms in Macau following the arrest. J.P. Morgan analysts have since suggested that the region’s VIP revenue will contract a further 30-50% in the coming weeks. Several casinos in Macau have also now reported that they will close VIP rooms run by junket operators.
Asia Gaming Brief (AGB) held a panel on the future of junkets and the implications for Asia’s VIP market, with several industry experts sharing their opinions on what will happen next.
When asked if he thinks the junket model is dead, Alidad Tash, Managing Director, 2NT8, responded: “It appears so. We all knew that junkets were going to go down, it’s been going on since 2013, but the last 12/13 days, just the speed by which they're on the way down and almost going to be diminished is mind-boggling.”
Martin Purbrick, Principal, Purbrick & Associates Ltd, agreed on the future of junkets, noting: “It clearly is the end of the junket model. I'd also say that it's not the case that junkets are suddenly illegal in the People's Republic of China, the junket model has always been illegal in the People's Republic of China. It's always been illegal. But in other business sectors, you'll see that the law is enforced arbitrarily in China, and that's the point for gambling as well. When the authorities want to enforce the law, they’ll enforce it.”
Carlos D. Simões, Partner at DSL Lawyers, explains the legal side of things, noting: “What I would say is that if we're going to go through the end of junkets, that's going to happen without minimum legal changes. Junkets have been a licensed activity in Macau since 2004, they are subject to supervision, and although we have gone through this storm since the arrest of Alvin Chau, the reality is there have been no legal changes to the existing regime.
“So I would say from a legal point of view, that everything is the same but at the same time, everything has changed.”
In terms of premium direct players, who spend a lot more money than they are actually allowed to bring into Macau, questions are now being asked as to how the government will prevent people from circumventing the capital rules by using things like China UnionPay or pawn shops. For Tash, and indeed several other experts on the panel, digital renminbi - a central bank digital currency issued by the People’s Bank of China - will be the way forward.
“I genuinely believe that China is flexing its muscle, it hasn't put the axe down, there's going to be more blood and it will definitely be affecting the China UnionPay, it will definitely be affecting the jewellery shop and the digital currency,” says Tash. “The digital renminbi is going to come a lot faster. It's definitely been put on the front burner.
“And as a result, Chinese patrons who have always been illegally taking money over $US50,000, they're going to have a hard time. Just a reminder that $US50,000 is the total amount of money that a single Chinese person is allowed to take out the entire year, including tuition, including gaming, including everything else.
“There have been instances where you can have a premium player make US$200,000 or US$250,000 a single bet. A typical gambler - a small premium mass player, which would be an upper high limit, but lower premium mass, it’s not even the best of the best - we're talking US$50,000 to $US200,000 per trip. And these guys make anywhere between ten to 25 trips a year. So there is no way that this is going to be sustained.
“However, again, you can for example go old school and wear an expensive watch, pay for it in Shanghai, get across the border and pay it back to a jewellery store and get a refund or maybe get 97% of the money back. Perhaps we're going to go that way until the government of China will force the casinos to go use the digital renminbi, in which case, God help the casinos.”
Simões and Martin return to the discussion to explain how different parties will be impacted by recent events, with the former saying: “This is going to be a very tough call for the Macau economy overall, because it's not only the junkets, there's a lot of activities that serve these VIP players that have been erected to serve them, to bring the best services, and there is a lot of spending in Macau that is related to them. So certainly there will be a major impact, and how this system without the junkets is going to be able to bring players to Macau to keep spending money, that's a question that at the moment no one can answer, but it will be a problematic one for sure.”
Martin meanwhile ponders the issue of how the money moves out of the mainland, for example through pawn shops. “The technical term for that is money laundering,” he says. “And that's the problem in Macau. So, the primary concessions, the licence holders, have to think very differently about their model in the future.
“The term ‘integrated resorts’ really means that. For the past decade, the primary operators have managed with this junket model and become cash-rich, and junkets become cash-rich as well, and junkets have become regional entities in some ways, Sun City of course with resorts in other countries.
“So there's a lot of shakeout from this that, unfortunately, I don't think will benefit Macau. That demand for gaming from mainland China is definitely still there. It needs to exit the mainland, but where does it go? I sense it will be difficult to go to Macau, because obviously it's within the PRC borders, and the authorities have greater controls and greater scrutiny on everything. And hence I sense that there's more of that demand likely to go across the region, maybe even back to Vegas if those players can get their money out of the mainland.
“But I think the junkets will be gone from Macau, and the junkets that have diversified into regional entities, including Sun City, which obviously had business in Australia, which has probably died, but have VIP rooms in Vietnam, Philippines, Vladivostok, these places are going to see some of that demand that was going to Macau going elsewhere in the future.”
Continuing on the theme of how different jurisdictions will be treated, Ben Lee, Managing Partner, IGamiX Management and Consulting, explains that a system of tiers will perhaps be put in place.
“We have seen some constraints already imposed by China on some of these other jurisdictions. So they are not limiting the crackdown on gambling just to Macau. It's not just a case of different countries or jurisdictions being blacklisted, but it's also probably a list of different tiers of treatment. Macau is probably on the lowest tier, so they will allow people to come into Macau, provided they are individually vetted. Same thing probably, maybe tighter, if they would go to Cambodia, as it is a friendly country to China. On the contrary, I haven't heard of any Chinese tourists being allowed into the Philippines as yet. We do have different tiers and we think that's what's happening.
“About Vietnam, it's very hard for us to say how China would treat Vietnam, as it hasn’t opened its border yet. There's a possibility that they could be very soft towards gambling in Vietnam initially, until they have built sufficient soft power, at which time then they will probably exercise some leverage over Vietnam.”
The problem is that in almost every jurisdiction in Asia, local gaming is not allowed or not encouraged, so you don’t have the mass to bulk up the bottom line. The question now is where does the revenue come from? There are no VIPs
There have, of course, been several resorts that have been built throughout Asia with the Chinese VIP in mind, and Lee explains that such projects will now need to be reconsidered due to what has happened with Macau.
“We have to redo and revisit the business model that was originally constructed because what was applicable two or three years is now no longer applicable because you can no longer rely on the VIP market force,” he adds. “So it's going to be harder for those projects, because now we’re going to have to revert to the traditional model, which is mass-centric. The problem is that in almost every jurisdiction in Asia, local gaming is not allowed or not encouraged, so you don’t have the mass to bulk up the bottom line. The question now is where does the revenue come from? There are no VIPs.”
Kelly Amato, Director - Southeast Asia Industrials, Fitch Ratings, weighs in on the discussion with a particular focus on Australia, and one of the major global operators in Crown Resorts. When asked if there are similarities between what has happened in Macau and Australia, she replied: “In some ways yes. We had the Crown arrests in 2016, so obviously there was heightened scrutiny when it came to VIP betting in China with regards to Crown.
“In some respects as well, yes it was probably showing that there was some smoke there, and then in 2019 we had the in-depth media investigations taking place on money laundering and the Chinese gaming laws. After those in-depth reviews, Crown was deemed unfit to hold their licence and they are currently going through that remediation process. And out of those reviews, there's also been a ban on junket operations in Australia now.”
As discussed in the panel, the VIP segment was never as important in Australia as it has been elsewhere in Asia, but the situation involving how gamblers are being dealt with now in the post-junket model remains an issue.
“The official banning is a relatively recent development,” explains Amato. “Overall, what we've actually seen over the past two years is a real demonstration of the importance and resilience of the domestic mass market in Australia. In Australia domestic mass is very strong, casinos basically have a monopoly in each of the cities so they do have a really strong mass market. And that has typically rebounded very quickly following the relaxation of any COVID-19 restrictions.
“So for the gaming operators here, there hasn’t been a reconfiguration as such, it has more so been a refocus on the business segments that historically has driven the gaming turnover and profits,” she adds. “So on the whole, the Australian operators business model effectively still remains intact. And that's reflected in Fitch maintaining its BBB rating on Crown, which still remains one of the highest gaming ratings globally. We don't think that the loss of the junkets will see all the VIP revenues disappear in Australia.”
Steve Vickers, Founder, Steve Vickers and Associates, suggests that it is a significant moment for Macau’s gaming industry, believing that it is now a much broader problem than many perhaps initially perceived.
“I don’t think China is targeting Macau,” he notes. “There are some very significant political changes underway in the mainland. There's been a massive impact on the technology industry, a huge impact on property, a crackdown in the education sector, and now we have the beginning of a major crackdown on gaming.
It’s not just about junkets and whether we describe them as premium mass etc, it has gone beyond that, this is a very significant difference, and I think the government will push very hard to try and turn Macau into something different than it is at the moment
“This is a significant change,” adds Vickers. “It’s not just about junkets and whether we describe them as premium mass etc, it has gone beyond that, this is a very significant difference, and I think the government will push very hard to try and turn Macau into something different than it is at the moment. But that will be a very painful exercise, and it brings up pretty scary issues for the current concessionaires.”
And staying on the topic of concessionaires, like most within the industry, Vickers remains unsure as to what the future holds.
“All bets are off,” he states. “It's an issue of both business risk and political risk. Each major concessionaire has a slightly different profile. There'll be a big difference between local and American and foreign ones given the current rate of relations between the US and China.
“And then within that there will be some divisions as to whether or not there will be new laws, given everything is in the hands of the government now. We have just six months to go before the concessions are up, of course they could be extended, but it gives the government a very strong hand to do what they want.”
And when asked if he believes it is worth bidding for the licence again, Vickers replies: “Everybody needs to really analyse what the impact is to their business, as political risk is absolutely paramount right now. It's time to work out what the options are. I've always hated the junket model, I'm surprised it's lasted as long as it has, but I think we can pretty well say that the junket model as we understand it is gone.”