Macau casinos have been smarting from the disappearance of a junket operator with HK$10 billion (US$1.3 billion) of unpaid debts, but industry players say its impact on the gaming industry is short-lived.
Most junket operators don’t see it affecting their business at all while some investment banks say it could lead to credit tightening in an industry already fraught with problems.
“The ultimate impact will not be very big, and HK$10 billion is not a big amount compared to overall gaming revenue,” a senior person in a junket operator told EJ Insight.
Macau’s gaming revenue grew 9.3 percent to 32.4 billion patacas in May, the lowest in four straight months since a 7 percent expansion in January, amid a host of mainland-related macroeconomic factors — a slowing economy and a widening campaign against extravagance and official corruption.
The growth came in below market expectations of a 14.5 percent expansion.
Although the industry does not look the worse for wear from the junket operator’s caper, the junket business could face a cash crunch as larger operators tighten liquidity to hedge against defaults, investment banks said.
“This has resulted in increasing challenges for small and mid-sized junket operators in accessing liquidity to conduct normal business,” Daiwa Capital Markets said in a research note on May 29.
The biggest impact will be on the VIP segment which is expected to feel the pain in the coming months, Daiwa said.
“We expect the VIP credit environment to be tight in the coming months, with junket operators being increasingly cautious and selective in extending credit,” it said. “We expect VIP gross gaming revenue growth to be depressed and negative near term.”
Daiwa revised its growth forecast for VIP gross gaming revenue to 8 percent year on year for 2014 from a previous estimate of 12 percent growth.
Grant Govertsen, a Macau-based analyst at Union Gaming Research, ruled out an instant hit to the VIP market but said the impact will be felt in some form.
“I’m sure that at some level, probably marginally, there are some investors who are less willing to lend money today… It would probably take several months before the lack of new investment would be felt,” he said.
Union Gaming Research has lowered its growth forecast for full-year VIP gross gaming revenue to 7 percent from 10 percent.
Huang Shan, reportedly a principal of junket operator Kimren Group, disappeared in mid-April, leaving behind HK$8 billion to HK$10 billion in debts, according to the Wonderful World website which publishes a list of alleged gambling debtors.
He had personally borrowed the money from patrons, promising them 2.5 percent return, significantly higher than the average interest rate, according to the EJ Insight source who had met Huang.
Subsequently, Huang was supposed to lend the money to high-rollers similar to how junket operators work. Instead, he might have gambled away most of it.
The source, who described Huang as “smart” and “friendly”, said Huang insisted he had made the loans in his own name.
That is perhaps the reason Macau’s gaming watchdog and police have yet to step in. They treat the incident as a private matter involving a personal loan, the source said.
Huang, a well-known figure in junket circles, would not have cost the casinos – and the government – anything as the money had gone to the casinos anyway, he said.
But he admitted that the incident had undermined investor confidence in the opaque operation of Macau’s 226 licensed junket operators, and it’s too early to say if it won’t happen again.
“Macau has a strong brotherhood culture,” he said, meaning it would be difficult to turn down a request by a friend who wanted to borrow money.
In a statement, Kimren Group said it accepts no responsibility for any private deals made by investors with Huang without its knowledge.
The relatively small junket operates in four VIP rooms in Grand Lisboa of SJM Holdings (00880.HK), StarWorld of Galaxy Entertainment (00027.HK), Altira of Melco Crown Entertainment (06883.HK) and MGM Macau of MGM China Holdings (02282.HK).
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