A VIP card player gambling casino chips in a stock photo. Image: iStock/Getty Images

Conventional wisdom in Macau says authorities favor mass market gambling by tourists over VIP play from high rollers using junket promoters to circumvent China’s currency transfer restrictions.

Both mainland China and Macau Five-Year Plans urge the global casino capital to diversify its economy and become a world center for tourism and leisure.

Underscoring the point, Chinese President Xi Jinping’s anti-corruption drive triggered 26 months of declining casino revenue that took the biggest bite out of VIP play.

Now, as Macau’s recovery steams into its second year with VIP revenue growth outstripping the mass market for the first time since 2011, it’s time to reconsider conventional official views on well-heeled gamblers.

“Chinese officials never said they prefer mass gaming over VIP,” IGamiX Management & Consulting managing partner Ben Lee recently told Macau Television’s TDM talk show. “If you think about it, who would you rather have lose their money: poor working class Chinese or a handful of rich entrepreneurs who have a sustainable ability to make such losses?”

Gamblers place their bets in a Macau casino. Photo: Wikimedia Commons/Niels Elgaard Larsen

In a follow-up interview, Lee emphasized, “There is no stated objective to transform gaming from VIP to mass, but always from gaming to non-gaming.”

Macau still has much to do on that front: non-gaming revenue barely touches double-digits as a percentage of total revenue, compared with 68% non-gaming revenue for the Las Vegas Strip in America.

Macau’s failure to diversify meaningfully into non-gaming “led to the rhetoric that we have diversified gaming,” Lee says.

High-end ups and downs

Shifts in the mass market to VIP balance have been striking. VIP earnings have fallen from nearly 70% of total gaming revenue in 2011 to 48% through the first half of this year, based on casino financial reports compiled by Union Gaming in Macau, a boutique investment bank and advisory.

In 2013, Macau’s VIP revenue comprised US$29.8 billion of US$45.1 billion in total; through 2016, VIP income fell steadily to US$12.7 billion, a collapse of 57%, or US$17.1 billion.

Over the same period, as total gaming earnings dropped 38%, mass revenue rose then fell and ended last year less than 1% below its 2013 total.

However, VIP leads the current comeback, growing 30% in the second quarter year on year and up 19% for the first half of 2017, while mass revenue has only grown 14%. The last time VIP outgrew mass was in the third quarter of 2011, Union managing director in Macau Grant Govertsen says.

Like the tourism and leisure track authorities prefer, mass gaming bets on China’s growing middle class. Mass revenue tends to be more stable than VIP thanks to its broader base, compared with the smaller universe of high rollers, who, according to JP Morgan, punt an average of HK$5-HK$10 million (US$644,000-US$1.28 million) per casino visit.

Virtuous Circle

For casino operators, mass gaming has profit margins four times greater than VIP yields and, at least in theory, presents further opportunities for growth beyond the casino floor since mass customers routinely pay for rooms, meals and shows that premium customers expect for free.

Ideally, mass customer spending promotes a virtuous circle that encourages further development of non-gaming attractions that make Macau a more appealing travel destination, advancing the tourism and leisure paradigm.

“I do believe that the authorities prefer mass gaming to VIP gaming,” Global Market Advisors senior partner Andrew Klebanow says.

Macau’s skyline at dusk. Photo: iStock/Getty Images

“Unfortunately, Macau’s casino operators cannot break free from the allure of the VIP segment. Granted, the margins are lower for VIP than mass gaming, but there is less risk. The junket operators get the players and money into the market, and they can go and collect on the markers,” he said.

But as VIP growth accelerates, there is mounting fear of countermeasures from both mainland and Macau authorities. So far, though, official scrutiny is spreading more broadly.

That includes lowered reporting thresholds for cash carried across the border and overseas transfers. Leading junket group Suncity Group recently issued a warning for its customers and agents to comply with the new rules, a caution that left many in Macau mystified. A group representative declined to elaborate on the warning.

Card Play

Restrictions on mainland bank cards in Macau, including facial recognition and national identity card scans at ATMs since July, and crackdowns on illegal UnionPay point of sale processors that make overseas transactions appear to take place on mainland soil, don’t hit VIPS or junkets.

Still, Morgan Stanley analyst Praveen Choudhary cites them as a key reason behind “rising risks” to the premium mass market, the sweet spot for casinos comprising VIP level players who don’t require junket commissions or credit.

Morgan Stanley’s new report, based on its annual survey of 1,000 mainland gamblers in Macau, highlights growing dependence on UnionPay cards across the mass market, plus slowing growth for premium mass.

The report notes mass revenue growth slowed during the second quarter at the two casinos with the highest concentration of premium mass, Melco’s City of Dreams and MGM Macau.

UnionPay credit cards issued by Chinese banks. Photo: iStock/Getty Images

No published analysis, however, explains why mainland officials have repeatedly moved against underground banking networks and illegal fund transfers, even corporate overseas acquisitions, but haven’t targeted junket money transfer activities.

Macau toughened financial reporting requirements for junkets agent Huang Shan made off with some HK$10 billion (US$1.3 billion) in investor funds in 2014 and cage employees pocketed some HK$285 million (US$36.8 million) from Dore Group’s Wynn Macau room in 2015. But those insider thefts, plus shrinking VIP demand, spurred three years of official junket closures and consolidation.

Leading junkets Suncity, Guangdong/Neptune and Tak Chun now control an estimated 80% of Macau’s VIP business, roughly double their share before the crash. Some junkets that slashed operations during lean times, such as David Group and Hengsheng, have staged comebacks this year, reopening VIP rooms as top-end demand and liquidity return.

“The authorities aren’t targeting any segment. What the Chinese government is against is hot money flows,” David Bonnet of Delta State Holdings, a gaming and property investment advisory, contends.

“Macau doesn’t want its casino industry to be known as a conduit for hot money. If junkets are doing that, they’ll crack down. If it moves to ATMs, then they’ll crack down on that.”

Muhammad Cohen is editor at large of Inside Asian Gaming and wrote Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie