Junket Crackdown May Be Headed to Macau

Today we should be celebrating another strong Macau earnings report from Melco Crown (NASDAQ: MPEL  ) . The company reported revenue growth of 9% to $1.1 billion and a very small increase in profit to $108.0 million in the quarter. Adjusted EBITDA was up 7%, a nice increase considering that the company hasn't added any new resorts this year.

Melco's resorts echo strong Cotai results from Las Vegas Sands (NYSE: LVS  ) and weak Macau Peninsula results from Wynn Resorts (NASDAQ: WYNN  ) . But the market isn't focused on results today, it is focused on a potential crackdown in junket gaming in Macau.

The reports from China
The Times of London reported that in February, Chinese law enforcement would begin cracking down on "Triad-linked 'junket' operators" who bring gamblers to Macau. Gambling in Macau through junket operators is a well-known way to launder large amounts of money out of China, and it has driven the high-end gaming growth in Macau. About 70% of gaming in Macau still comes from VIPs, usually with junkets, and a lot of this revenue could dry up if junkets are found to be Triad-linked or are involved with money laundering. The mass market is beginning to grow more quickly in the past year, but these VIP players still account for a large amount of the profits gaming companies earn.

The news has hit everyone in Macau today, but particularly junket Asia Entertainment & Resources (NASDAQ: IKGH  ) . The company had a 26% reduction in rolling chip turnover in January and there's now potential that law enforcement will be looking more closely at its junket business. It's not a good day to be a junket in Macau.

The signs were there
When China's new leadership was announced, there were rumors that cutting down on corruption would be a top priority. I said in November that this was a major risk for Macau gaming stocks going forward. It's also another reason I thought gaming stocks were too hot to handle last week after a long run-up. Multiples on gaming companies have exploded after Macau reported 19.6% growth in gaming for December, but I thought this could be a temporary pop given the new leadership.

If reports are true and there will be a crackdown after the upcoming Chinese New Year, then gaming could pull back significantly. At least for now, investors are taking a cautious approach.

Another reason to sell
We don't yet know if there will be a crackdown on junket play or if gaming revenue will slow down in 2013, but I think there's reason to believe Macau stocks are too hot. Gaming growth slowed rapidly and now that enterprise value/EBITDA multiples are sky-high and potentially as much as 70% of revenue is under siege, it's enough to make me cautious at the very least. Unlike Las Vegas, where non-gaming activity drives half of revenue, Macau still relies on gaming for a vast majority of revenue, particularly high rollers. 

The two stocks that could be hurt the most are Wynn Resorts and MGM Resorts (NYSE: MGM  ) because they have to rely on the Macau Peninsula for revenue, and Wynn has always relied on high rollers to drive results. The Cotai Strip, where Las Vegas Sands and Melco Crown are concentrated, has seen a big jump in mass market play, and while they would be hurt, Vegas would be somewhat insulated from a crackdown on junkets. 

I haven't bailed ship yet on my Wynn position, but this is making me think twice. The next few months will be extremely important for Macau and investors should pay particular attention to monthly gaming growth there. After the Chinese New Year, it may see pressure again. 

The crackdown on junkets was one of the top three risk factors I pointed out in our premium report on Las Vegas Sands, in which you'll learn about all the  opportunities and risks facing the company. We're providing a full year of analyst updates to go with it, so make sure to claim your copy today by clicking here.


Read/Post Comments (9) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On February 06, 2013, at 2:43 PM, WakeUpInvestor wrote:

    The report you are talking about in your article was not covered by the local media in Macau. So I guess someone is shorting all the way.

    The UK Times report that Beijing is “planning a crackdown” on “Triad-linked” junket operators after Chinese NY (late February) is likely more disruptive to Macau stocks than Macau revenue, and any stock disruption will likely prove short-term.

    The UK Times report discusses money laundering issues and China’s incoming president, Xi Jingping’s, anti-corruption campaign. HK Macau related stocks recovered from their midday lows, but still ended down 5.2%, on average. Macau contact and junket feedback last night came back sanguine as it related to any specific significant “crackdown,” against Macau and some questioned many aspects of the aforementioned article. However, contacts seem to concede a high-profile, even almost entirely symbolic move – or perceived one - could cause a small chilling effect amongst certain VIPs. Still, they were also quick to point out they believe any such chilling would likely be “on the margin.”

    Similar to once incoming China President Hu – and similar to many developing nations coming under a new leadership agenda - Xi Jingping highlights anti-corruption measures as an area of focus. China is currently experiencing a mild, still fragile, economic rebound.

    AERL is top notch and every weakness is a buying opportunity.

  • Report this Comment On February 06, 2013, at 6:50 PM, berg80 wrote:

    Trav,

    All I had to do was see the headline and I knew it was you getting sucked in to another "crackdown" story. It was not reported in Macau's media, nor China's, every analyst (JP M, Union Gaming, Sterne Agee, Citi, etc.) who has done extensive channel checks finds no evidence the story has credibility after talking to industry officials, the media, and junket operators, and the Chinese government's liason to Macau said just last week there would be no policy changes towards Macau, but why let the facts get in the way of good story.

  • Report this Comment On February 06, 2013, at 8:03 PM, berg80 wrote:

    "Macau names corrected ~6% today in light of an article in the UK newspaper The Times yesterday that China was planning to crack down on

    junket operators in Macau after the Chinese New Year in late February. Our channel checks suggest this is not the case." JP Morgan

    "Our channel checks and

    discussion with industry participants (including junkets, local news

    reporters – both in China and Macau – and casino operators) all confirmed

    that they have not heard anything about this matter." Union Gaming

    "Based on our conversations with 3 promoter/junket groups since the article came out, our view is that similar to previous articles analogous to this one - related subsequent sector weakness will likely prove a buying opportunity." Sterne Agee

    At least someone is doing something other than regurgitating a story, the genesis of which is attributed to.......wait for it........nobody (an un-named source).

    I know your Mom must be happy you are getting published, but no self-respecting person writes junk like this.

  • Report this Comment On February 07, 2013, at 1:37 AM, cp757 wrote:

    berg80 who ever said Travis was a self-respecting person. He writes junk like this because he has been pounding the table for WYNN for years.

    If you look at what WYNN will open in 2017 and compare it to what LVS will open in 2015 WYNN looks sick. WYNN will have an x shaped building with 2000 rooms off the strip and Las Vegas Sands will have the Eiffel tower and a huge building with 4000 rooms on the strip.

    Trouble flared in Macau in August with raids at casino and hotels. owned by Stanley Ho. Almost 1,300 people were questioned and about 150 detained after a series of attacks and murders, including the beating of Ng Man-sun, the biggest shareholder of junket operator Amax Holdings Ltd. (959)

    Ng, also known as “Street Market Wai,” was attacked by six men who beat him with hammers and sticks while avoiding hitting him in the head, the New York Times reported in June. Porda Havas, a public relations company hired by Amax, said the company wouldn’t comment before Wan’s release. The Macau gangster known as “Broken Tooth,” once accused of planning to kill the local police chief, said his release from prison today would not threaten law and order in the world’s biggest casino hub.

    Wan may try to go back to providing services and loans to VIP gamblers, who bet as much as the legal limit of 250,000 patacas a hand.

    Maggie Ma, a spokeswoman for Melco Crown and Janet Wong, a spokeswoman for SJM, didn’t return phone calls or e-mails to comment ahead of today’s release.

    “Wan Kuok-Koi( Broken Tooth) is yesterday’s man,” said Vickers, who runs Steve Vickers and Associates, a Hong Kong-based risk consultant. “Whilst he remains connected with his previous gang members, there is just no room for the ‘wild bunch’ in Macau anymore.”

  • Report this Comment On February 07, 2013, at 4:16 AM, 10HighSigns wrote:

    Can't Motley Fool find better people? Travis

    would do better in the fashion industry with

    new ideas about women's dresses. He does

    not listen to the conference call for Melco

    and therefore makes stupid comments that

    are incorrect and not even hearsay. This

    guy is in the wrong profession.

  • Report this Comment On February 07, 2013, at 11:15 AM, berg80 wrote:
  • Report this Comment On February 07, 2013, at 12:24 PM, Goldenpattern888 wrote:

    Hey look, another article from the dummy. MF really needs to cut this guy off. He is 100% fool and 0% motley. Never been to Macao, no clue what he is talking about, never checks facts.

    Travis, here is a challenge - show 1 fact from your article that you verified on your own. An email, a phone record, anything!

    We all know what the result is - you copied and pasted from another article which was poorly written and researched as yours.

  • Report this Comment On February 07, 2013, at 10:41 PM, berg80 wrote:

    The thing is, Trav has an axe to grind. And he will continue to use his platform at MF to write these worthless articles as long as they get published. Fortunately, the vast majority of people who read them understand Trav's M.O. is to never research what he writes. That would require work, fidelity to verifiable facts, and a modicum of journalistic integrity.........in other words things Trav abhors.

  • Report this Comment On February 12, 2013, at 9:56 PM, freeman8201 wrote:

    Yes, the junket operators work for people that gamble over 50K dollars only. Those vip patrons represent a good chunk but not all chinese nationals are working with such a big billfold. And they're going after money laundering schemes not gamblers.

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