JL Warren: Macau’s liquidity crisis more than a ‘Lehman Moment’

Equity research firm JL Warren says the liquidity problems faced by Macau gaming promoters, also known as junkets, are more severe than the bankruptcy of the American bank. The problem is related to the movement of capital from Mainland China and the anti-corruption campaign of President Xi Jiping, and is expected to cause gaming revenue to contract 27 per cent.
‘What many have labelled Macau’s ‘liquidity crisis’ is more than a ‘Lehman Moment’. While the downward spiral started with the anti-corruption campaign (ACC) and consequently a sharp reduction of wealthy gamblers from the Mainland, Macau’s plague will outlast the ACC thanks to the anti-capital flight measures’, the latest report of JL Warren Capital – titled ‘Macau: Here Come the Lean Years’ – reads.
‘Today, it is easier to get money out of the country legally due to a range of capital account liberalizations and the fact that China is cracking down harder on illegal currency outflows, the capital flight enabling role of Macau has been diminished’, it adds.
Troubled junket liquidity
The origin of the problem is traced back to the flight of Huang Shan, a junket individual who disappeared in May 2010 with HK$100 billion.
‘As credit became tighter for the VIPs, bad debt rose, the collection cycle lengthened, casino traffic slowed, junkets faced declining profitability and cash flows worsened. As a result, many junkets – starting from the small ones followed by the big ones – have begun to downsize their operations in Macau’, the report explains.
The company believes this trend will continue during this year and 2016, stressing that ‘around 50 per cent of the junket-originated VIP business and around 25 per cent of casinos-originated VIP business will disappear’. JL Warren expects this to be translated into a decrease of 46.25 per cent in the VIP segment.
UnionPay cap to hit mass market
The new measures related to the annual cap on withdrawals overseas for UnionPay cards issued on the Mainland are also believed to directly hit the premium mass segment, which will lead the whole mass segment, including the grind mass market, to dip 5 per cent.
“Based on our conversations with the industry, we estimate 50 per cent of card usage is for money laundering. Once the cash cap is implemented, some people will attempt to circumvent the new regulations by getting multiple cards, which is doable but rather inconvenient. We therefore believe that the new regulation will be quite successful in preventing illegal money transfers through Macau’, they added.
All in all, JL Warren Capital predicts gaming revenue in the territory will contract by ‘approximately 27 per cent exiting 2016/2015’, against Wall Street analysts’ predictions for 2016 that range from a decline of 7 per cent (Deutsche Bank) to an increase of 13 per cent (Goldman Sachs).
“We are four times more pessimistic than the most bearish view on Wall Street, just as we were in May when we revised our GGR estimates down from a decline of 30 per cent to a decline of 35 per cent in 2015/2014’, they said.