MACAU (May 18): Casinos in Macau face a growing volume of bad debt provisions, further hitting earnings in the world's largest gambling hub at a time when high-roller VIP punters are backing off.
China's slowing economy and a pervasive campaign against graft has sapped demand from wealthy gamblers and prompted operators in the southern Chinese territory to shift their focus to lower spend mom and pop gamblers.
As more and more rich Chinese steer clear of Macau's baccarat tables, revenues from the VIP sector have shrunk to around half of total revenue from over 70% at the start of 2014.
The bad debt provisions, which have more than doubled in 2015 and are seen growing further due to tightening regulation, are now adding to the pressure on the industry to adjust.
Macau’s new gaming regulator, Paulo Martins Chan, said the government was auditing junkets, middle men employed by casinos to lure big whale gamblers, to assess the size of their bad debts. Authorities also plan to establish a central credit database to minimize credit risk.
Chan, appointed in November 2015, is due to hold a speech at a Macau Gaming conference on Wednesday, which industry watchers will scour for details on any new regulatory measures.
"This increasing scrutiny and policy tightening, while positive for the segment’s long-term prospects, will likely be detrimental to the shorter-term prospect for the junket operators, VIP revenue, and their related activities," said Jamie Soo, analyst at Daiwa Capital Markets in Hong Kong. "Junkets facing further operating pressures may result in further VIP room closures."
Although annual income is still five times that of Las Vegas, last year revenues in the former Portuguese colony of Macau dropped 34% to US$29 billion ($39.7 billion).
Average monthly revenues have halved from what they were at the start of 2014 and are set to fall for a 24th consecutive month in May.
Receivables over 90 days -- amounts owed to the casinos by gamblers or junkets -- for Sands China, MGM China, Wynn Macau, Galaxy Entertainment, SJM Holdings and Melco Crown, doubled in 2015 with bad debts growing by 30% year on year.
Genting Singapore, which owns the tropical Sentosa resort in the city-state, said its bad debt provision more than doubled quarter on quarter in the first three months of the year.
While operators like Sands have tried to accelerate the transition to the mass market segment, they are also increasing the proportion of high rollers they lend to directly rather than through junket operators.
Macau’s junkets have been operating in the territory since the 1970s as casino gambling is illegal in mainland China and there is no formal mechanism to recoup debt. However they have been decimated by the slowdown over the past two years, with many small- and mid-sized junkets going out of business.
Daiwa estimates the junket industry’s total debt could be between HK$30 billion-HK$60 billion (US$5.3 billion to US$10.6 billion) Sands China, the Macau unit of US billionaire and prominent republican donor Sheldon Adelson, missed estimates for first-quarter earnings, with Morgan Stanley analysts attributing the negative surprise to a bad debt of US$22 million.