China's 'deep pockets' keep Macau on a roll, for now
The 30 per cent sell-down in Macau casino stocks that began on Friday appears partly due to investors' worries that junket agents may cut credit for high-spending gamblers.
But where do junkets, who issue credit to players and collect gambling debts (extrajudicially, in the case of the mainland), get their funding?
This question was put to executives at Las Vegas Sands Corp, the parent company of Sands China, on Monday at an investors' forum in Las Vegas.
'Unlike here where you think about bank financing or other alternative sources, these guys have just private investors - lots of them - and very happy investors, because the returns have been fat and happy for numerous years,' Las Vegas Sands president of global gaming operations Rob Goldstein said.
'[Junkets] have no problem accessing capital and they always tell me Americans don't appreciate how deep the Chinese pockets go,' he said.
That private mainland investors are bankrolling the junkets underwriting the growth of the world's biggest casino market is something of a revelation.
Among their other sources, a reliance on such informal or grey-market financing would help explain how Macau's party has continued over the past year despite Beijing's tightening of the financial system, including nine reserve ratio increases and five interest rate rises.
Investing in junkets may indeed look attractive to cashed-up mainlanders: real interest rates on mainland bank deposits have been negative for the past 19 months, while domestic stock and property markets continue to slump.
But investors' concerns are growing about defaults in grey-market lending on the mainland, based on recent reports from freewheeling Wenzhou. The reliance on private investors marks a departure from Macau's previous boom, when junket operators tapped the Hong Kong stock market for funding.
Goldstein said he was in Macau two weeks ago, where he met four or five of the top junket groups to screen candidates to operate VIP gaming rooms at Sands China's US$4 billion Cotai casino resort, which will open in phases from about March next year.
'The sense I get is that at all levels, middle-class and upper-class people see this as a rational way to get a very, very fat return on their capital. And, they like the fact they're investing in gambling,' he said.
Macau's booms and busts over the past decade have been driven by the credit-backed VIP baccarat segment, which accounts for more than 70 per cent of total casino revenue.
Before the financial crisis of 2008, listed junket investors including Amax Holdings, China Star Entertainment, Dore Holdings and Neptune Group raised a total of HK$14 billion from effectively reverse mergers with Macau junket operations. The result was a boom in VIP revenue growth in Macau, which peaked at 73 per cent in the first quarter of 2008.
The subsequent bust occurred after the junkets overextended their lending just as the financial crisis began. That led to a contraction in VIP revenue on a year-on-year basis for the three quarters to June 2009.
The current boom is even more reliant on VIP junket revenue, and on a much larger scale.
Macau's VIP baccarat revenue rose 49 per cent in the first half of this year to 91.12 billion patacas - nearly 2.5 times the level of the previous peak in the first half of 2008.
This time, the junkets have received capital from the casino operators, who will generally issue credit to junket agents equal to one month's worth of commission payments.
That is a stable, incremental source of relatively new capital for junkets, though not huge in the bigger picture.
But what happens if these private mainland investors start to feel a squeeze?
Investor attention has focused on Wenzhou, where a recent People's Bank of China survey showed that 89 per cent of families and 60 per cent of corporates were involved in informal lending during the second quarter of this year.
'Given the large proportion of private lending in Wenzhou, we note that defaults on private borrowing could trigger a negative chain effect throughout the lending system,' analysts at Barclays Capital wrote on Monday in a research note.
'In Wenzhou as in other parts of the country, private financing may initially help small and medium enterprises when bank lending turns tight, but after a while high interest costs are not sustainable for borrowers and defaults may increase,' they wrote.