Macau junket operator David Group to consolidate local operations and expand overseas
When times are tough, there’s a tendency for the rumor mill to shift into overdrive. Last month, media reports picked up a note from Japanese investment bank Nomura claiming that Macau junket operator David Group intended to wind down its operations.
It turns out that rumors of David Group’s demise have been greatly exaggerated.
On 16th January, the company’s director of corporate communications, Frank Ng, clarified the group merely intended to consolidate its operations in Macau amidst the ongoing decline in local VIP gaming revenue, closing, at least for the time being, three of its seven VIP rooms in the city. He added that the company is closely monitoring market conditions and can reopen the rooms if and when the business climate improves.
“We’re hibernating. Once we wake up, we can restart,” he said.
Meanwhile, David Group intends to reallocate its resources to explore emerging opportunities overseas. “This move aims to attract foreign patrons in order to diversify the visitor base of Macau’s tourism industry,” said Mr Ng. In the current quarter, the group plans to establish VIP operations in Manila, the Philippines, Da Nang, Vietnam and Jeju, South Korea. The group is also eyeing expansion in Australia by the end of the year, and is pursuing expansion plans in Europe.
Junkets generate the majority of Macau’s world-leading gaming revenues, more than 60% historically, by arranging travel to casinos for their wealthy clients, mostly mainland Chinese, and providing them credit in exchange for a share of the win in the rooms they operate, which is generally around 40% by agreement with the casinos.
But their profits in Macau have been battered over the last year as mainland VIPs are avoiding the city in increasing numbers due to several factors. The market suffered its first year-on-year decline in gaming revenue in the post-monopoly era in 2014, dipping 2.6% to US$44.1 billion. VIP revenue fell by $3 billion to $26 billion, and analysts expect that to shrink further this year, with no clear visibility on the timing of a recovery.
“Macau gaming revenue will recover but VIP revenues will not enjoy the exponential growth of previous years,” as Paul Bromberg of industry consultants Spectrum Asia has noted.
The causes have been well-publicized.
Mainland China is in the throes of a massive central government crackdown on high-level corruption whose aims include stemming illicit capital flight, which is endemic to the country, and taking a tougher stand against the evasion of strict daily and annual limits on the amount of yuan that can legally be taken out of the country. Transit visa rules also are being more strictly enforced, cutting down on the number and frequency of visits to places like Macau.
At the same time, the Chinese economy is growing at its slowest pace in years, and property prices, the locus of much of the country’s individual wealth, and its debt, have been falling.
One effect is that VIPs are taking longer to repay their markers, which has contributed to a liquidity crisis within the junket infrastructure. Smaller, less well-capitalized promoters are being forced out of business and larger promoters are more focused than ever on consolidating operations and rationalizing costs.
Their casinos partners are doing much the same, reallocating scarce resources—new table games are strictly rationed by the Macau government to 3% growth per year—to higher-margin high-limit cash play and renegotiating terms with their VIP room operators.
“Junket consolidation is likely to be one of the key themes in 2015 as market volume (both official and side-betting) shrinks,” said Credit Suisse analysts Kenneth Fong and Isis Wong in a recent client note. “Going forward, we expect more small- to mid-size junket groups quitting the business, leaving the junkets with stronger balance sheets behind. Despite the short- and medium-term volatilities, this should benefit the system’s long term stability, in our view.”
A crackdown on money laundering by law enforcement agencies in China, Macau, Hong Kong, the United States and worldwide also has cast the junkets in an unwelcome spotlight, and casinos are under increasing pressure—particularly the three Macau operators that are subsidiaries of US companies—to step up scrutiny of their junket contractors, their players and the sources of their funding.
Finally, with the market under increasing pressure from Beijing and the local government to diversify the Macau economy away from its near-total dependence on casinos for tax revenue, capital investment and employment, the casino operators, mindful that their licenses are coming up for renewal beginning in 2020, naturally are shifting most of the billions of dollars they’re plowing into new resort construction toward more tourist-oriented, non-gaming offerings.
Pivoting with the prevailing winds, David Group, which has operated in Macau for a decade and is ranked as one of the city’s 10 largest junkets with an estimated 3-5% market share, is joining leading competitors such as Suncity Group and Hengsheng Group in diversifying into other businesses and into new and emerging gaming markets.
The latter course is appealing on a number of levels.
Accessibility is one, as visa rules tend to be more flexible in other Asian countries. It’s safer politically, with less scrutiny from the Chinese government. Casinos eager for the business tend to offer lower qualifications and more generous terms. The lower tax thresholds they generally operate under make it more feasible for them to do so. And this can be less risky and potentially more lucrative for the junkets as their income streams outside Macau tend to be based on a percentage share, known as commissions, of their customers’ betting volumes—generally calculated through the use of special non-negotiable playing chips—rather than a split of their customers’ losses.
David Group, which owns a travel agency and a film production company, also publishes a lifestyle magazine in China to promote its brand and offerings, and Mr Ng says the company takes its VIPs shopping and sightseeing in desirable destinations across Asia, along with providing them opportunities to gamble at its private rooms in local casinos. Its customers are now visiting markets such as Manila, which is expanding with more elaborate resorts, Vietnam and South Korea, which is expanding in line with a friendlier official stance toward resort casino investment.
The company also plans to enter the Australian market by the end of the year and later to expand to Europe, Mr Ng said.