Macau Junket Cycle not Dealing with Structural Issues, Says Goldman Sachs

Posted on: October 8, 2020, 01:06h. 

Last updated on: October 8, 2020, 02:22h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

The current weakness in Macau’s junket industry is a more symptom of supply issues, not structural damage. Today’s cycle, though weak, isn’t as bad as the slump of 2014-15, according to Goldman Sachs analysts.

Macau Junkets
Wynn Macau. China is crimping junket visits, but Goldman Sachs says the situation isn’t structurally bad. (Image: New York Daily News)

Gambling is illegal everywhere else in China. Junkets entice VIPs to visit the gaming enclave, but over the past several months, those players are yanking billions of dollars from accounts held at gaming properties, as Beijing cracks down on cross-border money transfers, citing national security risks.

We do not believe the current cycle is as severe as the one in 2014-15, when the anti-graft campaigns by the Chinese government affected both gaming demand (i.e., removal of grey income) and supply (i.e., credit crunch in a fragmented, highly leveraged junket system),” said a team of Goldman analysts in a recent client note.

Still, junkets are integral to Macau’s still slow-moving efforts to rebound from the coronavirus pandemic. The sector accounted for half of the special administrative region’s (SAR) $36.5 billion in 2019 gross gaming revenue, according to Reuters data.

Not Jumping for Junkets

The current state of affairs is tricky for Macau operators. As gamblers pull cash from junket accounts, those companies yank deposits from casino accounts. Some gaming companies are dealing with the situation by capping the number of cash chips junket firms can withdraw.

The six Macau concessionaires are Sands China, Wynn Macau, MGM China, Galaxy Entertainment, SJM Holdings, and Melco Resorts, but not all are equally levered to VIPs. For example, Sands and Galaxy control almost half the mass and premium mass market. Conversely, Melco, and Wynn are more dependent on top-tier gamblers.

As the Goldman analysts point out, it’s all about ease of moving funds in the current environment.

“This time around, the impact is mostly on the supply side, as greater difficulty in transferring money offshore by Chinese agents/players will likely result in junkets turning more cautious on credit extensions, with some already contemplating diversifying and changing their business model,” according to the bank.

Dented Recovery

While analysts and industry observers widely expect Macau to rebound from the COVID-19 pandemic more rapidly than Las Vegas, the recovery time line in the Asian gaming hub is growing longer.

The Golden Week holiday wrapped up today, with visits falling nearly 87 percent year-over-year, meaning the highly anticipated fourth-quarter resurgence in GGR figures will likely be pushed out to 2021.

Additionally, Macau is still hamstrung by travel issues. It’s taking a week to 10 days for tourist visas to be approved on the mainland, while Hong Kong still has a 14-day quarantine protocol in effect for travelers arriving from the gaming center.

As for junkets, Goldman believes the situation will steady, and high-end gamblers are merely waiting out Beijing’s clampdown on money transfers.

“As far as demand is concerned, while certain players may hold off their gambling trips near-term until the situation stabilizes, in view of the crackdown [in China] of illegal gambling activities and the introduction of a ‘banned player list’, we do not see any structural issue and/or substitutes for brick-and-mortar gambling in the medium term,” said the bank.