At a time when high-roller VIP punters are backing off, Casinos in Macau face a growing volume of bad debt provisions, further hitting earnings in the world’s largest gambling hub.

The operators in the southern Chinese territory have been prompted to shift their focus to lower spend mom and pop gamblers due to China’s slowing economy and a pervasive campaign against graft has sapped demand from wealthy gamblers.

Revenues from the VIP sector have shrunk to around half of total revenue from over 70 percent at the start of 2014 as more and more rich Chinese steer clear of Macau’s baccarat tables.

Further, the bad debt provisions are now adding to the pressure on the industry to adjust. Such debts have more than doubled in 2015 and are seen growing further due to tightening regulation.

To assess the size of the bad debts, the government was auditing junkets, middle men employed by casinos to lure big whale gamblers, said Macau’s new gaming regulator, Paulo Martins Chan. In order to minimize credit risk, authorities also plan to establish a central credit database.

In addition to diversifying, the city needed to improve its image, Chan, appointed in November 2015, told a Macau Gaming conference.

“We will continue to further strengthen and refine our laws and regulations and to improve the overall quality rather than quantity of the gaming industry,” Chan said, without providing details.

While helpful in the long-term, stricter rules could pinch.

“This increasing scrutiny and policy tightening, while positive for the segment’s long-term prospects, will likely be detrimental to the shorter-term prospect for the junket operators, VIP revenue, and their related activities,” said Jamie Soo, analyst at Daiwa Capital Markets in Hong Kong.

“Junkets facing further operating pressures may result in further VIP room closures,” Soo added.

Last year revenues in the former Portuguese colony of Macau dropped 34 percent to $29 billion even though the annual income is still five times that of Las Vegas. Average monthly revenues are set to fall for a 24th consecutive month in May and have halved from what they were at the start of 2014.

With bad debts growing by 30 percent year on year, receivables over 90 days — amounts owed to the casinos by gamblers or junkets — for Sands China, MGM China, Wynn Macau, Galaxy Entertainment, SJM Holdings  and Melco Crown, doubled in 2015.

It’s bad debt provision more than doubled quarter on quarter in the first three months of the year, said Genting Singapore, which owns the tropical Sentosa resort in the city-state.

The proportion of high rollers that the casinos lend to directly rather than through junket operators is being increased even as operators like Sands have tried to accelerate the transition to the mass market segment.

As casino gambling is illegal in mainland China and there is no formal mechanism to recoup debt, Macau’s junkets have been operating in the territory since the 1970s.

However with many small and mid-sized junkets going out of business, they have been decimated by the slowdown over the past two years. The total debt for the junket market could be between HK$30 billion-HK$60 billion ($3.9 billion to $7.7 billion) according to estimates by Daiwa.

(Adapted from Reuters)

Categories: Economy & Finance, Uncategorized