Macau casino junkets thrive despite China credit squeeze - 18th October 2011

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A funding squeeze on Chinese entrepreneurs has not ruffled the feathers of Macau's multi-billion-dollar casino industry as their core customers -- super-rich mainland Chinese -- and junket operators remain flush with liquidity, industry executives and analysts said.

Shares of Hong Kong- and U.S.-listed gaming companies such as Sands China Ltd, Wynn Macau Ltd, Galaxy Entertainment Group Ltd, Melco Crown Entertainment Ltd and SJM Holdings Ltd plunged earlier this month as fears over a heightened credit squeeze on small-to medium-sized enterprises in China hammered the sector.

The credit squeeze, which reportedly resulted in a string of Chinese entrepreneurs going into hiding to avoid repaying loans, has also raised concern of restricted funding channels for junket operators -- middle men who provide credit to wealthy mainlanders for gambling in Macau.
Kenny Leong, chief executive of Nasdaq listed Asia Entertainment and Resources Ltd, one of Macau's major VIP gambling room promoters, dismissed the concerns, saying large junkets mainly dealt with super-rich clients with sound creditworthiness.

"Right now big firms do not have such problems. This may be related to the smaller operations," Leong said, adding that smaller junkets were affected because of their more informal funding channels and less rigorous checks on customers.

AERL is one of 190 licensed junket operators in the former Portuguese enclave, an hour from Hong Kong by ferry. The junket industry accounts for 75 percent of Macau's total gaming revenue, which analysts forecast to reach $34 billion this year, more than five times the $6 billion projected for rival Las Vegas.

Leong's firm, among 40 junket operators that bring in more than 80 percent of Macau's VIP revenue, deal with mid- to high-tier VIP customers who spend at least HK$10 million ($1.3 million), while smaller junket operators cater to lower tier VIPs who spend less than HK$3 million at a time.

"SME entrepreneurs are mainly classified as lower tier patrons," the 41-year-old junket veteran told Reuters as he sipped a glass of iced water in one of AERL's VIP gaming rooms at Galaxy Entertainment's Starworld casino.

CASH RICH

Shares of Macau casinos had staged a tepid rebound along with the broader stock market in the past week, spurred by Beijing's pledge to provide credit support for SMEs and hopes for an easing of the European debt crisis.

But the stocks slid sharply on Tuesday after China released figures showing GDP growth slowed in the third quarter. Gaming counters dropped 20-40 percent below their August peaks as investors panicked over China's economic outlook and the future of the highly lucrative industry.

Analysts say Macau's junkets and casinos are better positioned to weather the current global economic uncertainties compared with 2008, when the sector collapsed along with the global financial crisis.

"Compared with 2008-2009, the difference is casinos and junkets are cash-rich. They can still drive growth in the interim by pumping more working capital into the system," said Credit Suisse analyst Gabriel Chan in Hong Kong.

Galaxy's Chief Financial Officer Robert Drake said there had been no signs of a slowdown in VIP gaming revenue, as evidenced by massive revenue booked during China's "Golden week" National Day holiday starting on Oct. 1.

"This year's Golden Week has again proven to be a huge boost to business. The growth of revenue in Macau -- both VIP and mass market -- has been strong and we have seen no signs of any recent slowdown," the CFO of the $8 billion company told Reuters.

Leong said AERL extended HK$5 billion in credit to VIPs in the first five days of October alone.

"People are saying Macau suffers from trouble in China, this is not the case," he said.

($1 = 6.386 yuan)
($1 = 7.779 Hong Kong dollars)

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