The issue by mainland China authorities of an arrest warrant for Suncity Group CEO Alvin Chau and subsequent arrest of 11 people connected to the group is “really bad” for Macau’s junket industry, but should have little long-term impact on the city’s casino operators, according to JP Morgan analysts.
In a weekend note, DS Kim, Amanda Cheng and Livy Lyu note the warrant issued for Chau not only confirms that China’s recent crackdown on cross-border gambling does include Macau but that it also represents a significant enhancement of enforcement activity as the first high-profile crackdown on a junket’s senior management itself.
“Most (if not all) of the previous arrests and detentions over the past 6+ years have focused on agents and ‘foot soldiers’ who actually carried out illegal operations,” they write.
“What’s the impact? Really bad for the junket/VIP industry, it goes without saying. Mr Chau is arguably the biggest (and certainly most famous) figure in the junket industry, as the founder/CEO of the undisputed biggest junket in the world, Suncity, which accounted for 40% to 45% of the junket market.”
Being arrested “for just running the junket and doing what seems to us like very normal junket activities should send a chill down the spine of any and all junkets, in our view.
“We wouldn’t be surprised to see junket VIP revenues immediately contract in the coming weeks, perhaps by 30% to 50% from current run-rates.”
The news is, however, far from disastrous for Macau’s casino operators given the decline in the VIP market in recent years, a greater focus on the lucrative premium mass market and moves towards bringing VIP play in-house.
“VIP accounted for less than 40%/15% of GGR/EBITDA in 2019, and we’ve already assumed structural impairment to this segment given heightened scrutiny since 2020,” JP Morgan states.
“We’ve modelled VIP only driving 1% to 4% of operators’ EBITDA in 2023 – or about 2% of sector profit as a whole – so it really doesn’t move the needle for our estimates anymore.”
Nevertheless, it is likely that the share prices of Macau’s concessionaires could be impacted in the short term.
“While the news is only directly related to junket/VIP, some investors may interpret this as a signal of a potentially broader clampdown on gambling itself, a view that we don’t agree with but cannot disprove,” they write.
