ONE of the week’s more interesting stories was news of the detention by Chinese authorities of at least 18 people associated with Australia’s Crown Resorts, including the company’s Executive Vice President for VIP International Jason O’Connor. The group was apprehended, the Chinese said, for “investigation of gambling offenses,” presumably for recruiting Chinese high rollers to casinos in Australia and Macau.
For a little over a year, the Chinese government has been aggressively pursuing an initiative it calls “Operation Chain Break,” with an aim to stop the flow of money, much of ill-gotten, from China to overseas destinations by way of casino gambling. The Chinese crackdown, which has been ongoing in one form or another since 2012, has had a serious impact on the gaming industry in Macau.
The detention of the Crown contingent, although the Chinese authorities have not offered many details, was presumably based on laws forbidding explicit advertising of gambling in China. The group was not caught all together, but was swept up in separate raids in Shanghai, Beijing, Guangzhou and Chengdu, according to reports from Australian media.
In the latest move Macau, at prodding from Xi Jinping’s government, banned so-called “proxy betting,” in which a subordinate at a betting table relays information and receives instructions from the bettor by telephone.
Although casino trade watcher Calvin Ayre in June pointed out that gamblers were already finding ways around the ban on telephones at gaming tables, the rule has had an effect, further depressing Macau’s gambling industry and providing a boost to more welcoming locations like Laos, Vietnam, and the Philippines.
The Philippines, it seems, although ostensibly still looking at steadily rising tourism as a justification for expanding the casino industry, is evidently banking on Macau’s collapse.
In the wake of the arrest of the Crown personnel, the gaming company’s stock understandably tumbled (it lost more than 13 percent in Sydney), while ASX-listed Star Entertainment Group Ltd, Crown’s competitor, dropped six percent; in trading in Hong Kong, the stocks of Macau stalwarts Melco Crown, Wynn Macau Ltd, and Sands China all took a hit. Local gaming companies, however, reacted in quite a different way; in Friday trade, Resorts World owner Travellers International gained 0.93 percent, while City of Dreams operators Premium Leisure Corp. and Melco Crown Philippines added 0.95 percent and 0.52 percent, respectively. Bloomberry, the owner of Solaire Resort and Casino, saw its shares fall, losing 4.85 percent, which a couple analysts speculated might have been related to the Crown incident – Solaire figured in the money-laundering scandal involving RCBC and a couple of Chinese junket operators earlier this year – but there was not a clear indication of that, at least not from the company itself.
In a report last month, World Casino Directory noted a stark contrast between the second-quarter revenue growth of the privately-operated casinos and state-run Philippine Amusement and Gaming Corporation (Pagcor); the private concerns – Resorts World, City of Dreams, and Solaire – saw their collective revenues jump nearly 40 percent year-on-year to $543.12 million, while Pagcor only saw a modest increase of about six percent, bringing $166.47 million.
A local analyst from Maybank ATR Kim Eng Securities attributed some of the big increase, at least as far as the Entertainment City operators were concerned – Solaire and City of Dreams combined revenues were up more than 69 percent – to City of Dreams being fully operational this year, whereas it was not in the second quarter of 2015. Nonetheless, the impact of foreign high-rollers was plain; in Pagcor’s second-quarter report, it noted that revenues from junket operations for the private casinos more than doubled during the quarter to more than $187 million, while non-junket gaming and slots – the two components of the mass-market segment – only increased by 22 percent and 12 percent, respectively. Maybank’s analyst did note that telephone-based proxy gambling, now banned in Macau but legal here, drove some of the revenue boost, but in a separate report, financial services giant Morgan Stanley was a bit more emphatic about it, saying that the Macau telephone ban would clearly “benefit the Philippines VIP market.”
That’s good news on the face of it, because it’s axiomatic in the casino industry that gaming revenue is built on high rollers; the mass market, the weekenders or the people spending an evening entertaining themselves, spending a few hundred or a few thousand on gambling, is not and never will be the casinos’ bread and butter; it is virtually a mathematical certainty that mass-market volume could never be large enough to actually support casino revenue growth, certainly not of the magnitude that local operations are now enjoying, and need to recoup their massive development investments. It’s comforting news for the developers of the big new projects set to join Solaire and City of Dreams in Entertainment City, Okada Manila and Resorts World Bayshore, both of which should be opening in the next two years.
But all of this is happening at a time when the country is under the leadership of a president who has made no bones about his distaste for gambling in general, and is furthermore at this very moment courting the Chinese government, who has traditionally shown no hesitance to extract concessions that align with its policy goals from would-be client states. Add to that the heightened awareness of the role, or potential role, of Philippine casinos in money-laundering operations and other similar hanky-panky – which is not to accuse the casinos here of wrongdoing, it’s just that sort of business – and the prospects of being able to sweep up the business Macau has lost and is continuing to lose begin to look very shaky indeed.
For now, the Philippine gaming sector can simply make the most of the opportunity Macau’s woes present, but if it is counting on that being anything but a very short-lived advantage, and is not preparing a fundamentally different business model to be used soon, it is headed for a spectacular disaster.