China's Golden Week national holiday last month helped move monthly gambling revenue in the right direction for Macao casinos. Instead of the 90% or worse decline witnessed in each of the prior six months, revenue was down only 72% in October. Not the big lift that was hoped for, but a base upon which to build.

And now casino operators that rely upon Macao for the bulk of their revenue and profits, like Las Vegas Sands (NYSE:LVS), Melco Resorts & Entertainment (NASDAQ:MLCO), and Wynn Resorts (NASDAQ:WYNN), may soon have more tailwinds to help them. 

China is cracking down on casino junkets once again, but because the new rules apply to junkets serving markets outside of Macao, it should help casinos in the city.

Baccarat chips

Baccarat chips. Image source: Getty Images.

Junkets under pressure

Beijing constantly frets over capital outflows from Macao, and in the past has cracked down on junkets and VIP gamblers in a bid to ensure money doesn't leave the region.

The latest efforts apply to junket operators serving casinos in other countries and would impose severe (though as yet undefined) penalties on junket operators that attempt to entice high rollers on the mainland to travel elsewhere.

China already has laws prohibiting such marketing, and in 2016, 18 employees of Crown Resorts were arrested for illegally trying to lure VIPs on the mainland to its casinos in Australia. Those laws carry penalties of up to 10 years in jail.

Junket operators are already under pressure, and their numbers have fallen from 235 in 2013 to 95 at the end of 2019, some 60%. The new regulations could see many more go under, and some analysts see them dropping to 80 by the end of this year.

Going for mass appeal

Macao's casinos have long depended upon junket operators to bring VIP gamblers to their resorts. In exchange for a percentage of the money the high rollers drop at a casino's tables, the junket operators ply the VIPs with various benefits and amenities to get them to play at specific resorts, and even lend them money for their excursions.

Yet that business has been hampered by Beijing's efforts to force casinos to adopt more amenities attractive to mass market tourists. The resorts the casinos opened in the Cotai area of Macao were a direct result of those policies. 

Sands, for example, opened the Parisian with its half-scale version of the Eiffel Tower as a tourist attraction, and the Wynn Cotai resort installed a gondola ride and opened luxury retail stores, while Studio City International Holdings opened a theme park in its resort with a giant figure-eight Ferris wheel and a Batman-themed flight simulator ride.

And the mass-market segment continues to grow in importance. It represents over half of casino gross revenue with third-quarter mass market baccarat jumping 77% over the disastrous second quarter, compared to VIP baccarat, which rose 56%.

A new beginning

The new regulations could give the VIP market the boost it needs. Junket operators have increasingly spent more time bringing VIPs to countries that offer more profitable returns. The new crackdown could see the junkets redirecting VIPs back to Macao.

Analysts at Sanford C. Bernstein believe Macao will be seen by high rollers as the safest place to bet, but they also note mass-market gambling will be the biggest driver of casino growth in the future.

There are risks. The new laws, while focusing on foreign markets, also put VIP gamblers and their wealth back in the spotlight, which is where they don't want to be in the communist country. Prior crackdowns on capital outflows were part of the reason Macao spiraled into a two-year recession as VIPs hunkered down to stay out of view.

Resort operators like Sands, MGM, and Wynn hoped Golden Week would be the beginning of a resurgence. It wasn't as big as expected, but with travel restrictions now eased again and China's economy growing more sharply than expected, the casinos may be back on the road to profits again.

 
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