Photographer: Jerome Favre/Bloomberg

Wynn, Melco Hold 'Riskiest Slice' of Macau's Gaming Business

  • Gaming promoters hold at least $3.9 billion in bad debt
  • Macau government pushing for greater oversight and scrutiny

Melco Crown Entertainment Ltd. and the Macau unit of Wynn Resorts Ltd. are potentially most at risk among casino operators exposed to debt-ridden gaming promoters as the local government continues its push for oversight, according to Daiwa Securities Group Inc.

The Macau government’s drive to compensate investors cheated by a former employee at a junket operator last year exposes risks and "substantial responsibilities" casinos and operators in the world’s largest gambling hub face, according to Daiwa analyst Jamie Soo in Hong Kong. Gaming promoters, who lend to high-stakes gamblers, are still under significant operating pressure with at least HK$30 billion ($3.9 billion) in bad debt still outstanding at conservative estimates, he wrote.

"This problem of rising bad debts continues to be a major issue in Macau, and is among the key drivers for the successive junket mergers and closures that we continue to see today," Soo wrote in a note April 22. Wynn and Melco hold the "riskiest slice of the industry’s junket business" because they have the most revenue among casino operators exposed to the high-stakes gambling segment, he wrote.

Revenue in Macau’s $30 billion casino industry -- larger than its glitzy Las Vegas counterpart -- has fallen for the past two years as money flows from the profitable VIP segment have tightened. Chinese President Xi Jinping’s anti-graft campaign, as well as heightened scrutiny of the junket operators integral to the sector, have led to reduced gaming earnings.

Dore Case

Sands China Ltd., the Macau-based casino unit of Las Vegas Sands Corp., reported last week first-quarter profit missed analysts’ estimates as China’s economic slowdown hurt visitor spending. Wynn Macau shares have dropped about 60 percent since June 2014, when Macau reported the first drop in gross gaming revenue after China’s government launched its crackdown on corruption.

Sands China fell 0.5 percent in Hong Kong at the close of trading Monday while Wynn Macau rose 1.2 percent. The benchmark Hang Seng Index dropped 0.8 percent.

Last September, Dore Entertainment said that some of its customers may have been cheated by a former cashier manager who allegedly stole at least HK$100 million from it. Macau’s government is seeking to resolve the case and the legal outcome could expose casino operators who allow the junkets to operate at gaming facilities, wrote Soo.

As most junket operators are barely breaking even, if not loss-making, it is possible for Dore-like incident to occur again, said Soo. Although the middlemen’s operating risks don’t pose a risk to the casino operators’ short-term profit, they would be at risk from a legal, corporate governance, and balance-sheet perspective, according to Soo.

Macau’s government has announced stricter scrutiny for the gaming promoter industry since the Dore incident as the new gaming regulator Paulo Martins Chan started his new role last December. Authorities in Macau began requiring junkets to adhere to stricter accounting standards this year and announced that 35 junket operators were denied licence renewals due to their failure to submit financial records.

Casino operators have responsibilities related to the oversight, supervision and reporting of junket activities taking place in their casinos under Macau’s gaming laws.

Bloomberg News first reported this month the Macau government has been in talks with the junket industry on raising the capital requirements for new comers, with one of the proposal increased it to to 10 million patacas from the current 100,000 patacas. Although the junket segment is unlikely to be affected by the proposal in the immediate future, the new development indicates the policy direction points to further scrutiny, said Soo.

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