Macau's junket operators branch out

By Farah Master of Reuters. With additional reporting by Ranajit Dam

When junket operator Suncity opened its first high roller baccarat table at Steve Wynn's Macau casino in 2007 to lure China's wealthiest punters, the firm had fewer than 30 employees and no computers or equipment other than pen and paper.

Five years later, Suncity has emerged as the dominant junket in the Chinese territory. It is planning to open its own resort, independent of casino stalwarts such as Las Vegas Sands, and is expanding into everything from mining to films.

Macau's booming revenues that totalled $38 billion last year - six times that of the Las Vegas strip - are indebted to its unique VIP junket system, where licensed middlemen act on behalf of the casinos to attract “big whale” spenders by arranging their travel and accommodation and handle their gambling credit. Now the transformation of the former Portuguese colony from a hotbed of crime into a playground for China's nouveau riche has spawned a new breed of junkets, eager to shed the industry's shady image and establish themselves as multinational conglomerates.

“Suncity is a young and very energetic corporate. There is a need to be diversified,” says YM Choong, a senior executive at the company. “For future investments, we would look to expand in different areas, particularly property, finance and media. We would look to list other parts of the business.”

According to Julia Brockman, partner at DSL Lawyers in Macau, since junket operators became subject to licensing by the government in 2002, she has observed three major trends – concentration, closer cooperation with the gaming operators, and institutionalisation. “Traditionally, there were many different operators running their business as junkets in Macau and nowadays, that has evolved to a number of them having been acquired or having come under the same ownership or under the same group,” she says.

Secondly, she sees much closer cooperation with the casino operators, the concessionaires that have been granted a gaming concession by the government to run casinos in Macau. “Although junkets have always been decisive to the operation of the gaming industry in Macau, for many years, they were only working closely with SJM from the empire of Stanley Ho,” says Brockman. “Only more recently, when the new gaming operators started their businesses and reached a certain level of growth, they became increasingly aware of the importance of these junkets, resulting in a much closer operation between those casino operators and the junkets.” She adds that this has led to a cap determined by the government on the commissions that can be paid to the junket operator, precisely to tackle a commission dispute that started a few years ago between Melco and the other operators in Macau.

Finally, Brockman notes that junket operators today are more institutionalised and are now being run as proper corporations. “A few have been listed on the stock exchange - usually through black listings because it is quite difficult to get a proper licence to the direct listing of the junket operations,” she says. “Even for those that have not yet been listed, it is obvious in the way they are structuring the business that they have plans to list it in the future.”

The evolution of the junkets is welcomed by the authorities, who are eager to reposition Macau as an all-round international travel destination, but could shake up the dynamics of the world's largest gambling market.

The junkets have traditionally worked for the casinos, which rely on them for more than two-thirds of their revenue. Now, leveraging their extensive customer databases and sophisticated resources, they could one day start competing with them.

“Macau's junket operators are fully aware that their network and database of high net worth VIPs is valuable,” says Edmund Lee, a partner at PwC in Hong Kong who focuses on the gaming sector.

Suncity, headed by 39-year-old Alvin Chau, is one of more than 200 junket operators licensed in Macau on China's southern coast, the only place in the country where locals are allowed to gamble in casinos.

The biggest operators, which include Neptune, Golden Group, Jimei and Dore, account for more than half the monthly junket turnover of $75 billion.

Despite robust mass market demand, a crackdown on corruption and pervasive graft has seen the supply of millionaire VIP players to Macau decline over the past year, prompting junkets to seek to diversify their income streams.

“Because of the growth that junket operators have been able to induce in their businesses in the last few years, they are now diversifying their activities and investing in businesses that are parallel or accessory to their main activity,” says Carlos Simoes, also a partner at DSL Lawyers. “That includes restaurants, bars, travel agencies and car rentals. But above all is real estate investment.”

Suncity, which makes around HK$135 billion ($17 billion) in monthly gaming turnover, according to Choong, has expanded into mining with iron ore operations in Indonesia.

It has also branched out into financial services in Hong Kong with 24-hour securities, forex and commodities trading, real estate in China, food and beverage, film and media. The company has two listed arms, Sun International Resources Ltd and Sun Century Group Ltd.

Golden Resorts Group, headed by Hong Kong billionaire Pollyanna Chu, has been invested in financial services through listed arm Kingston Financial Group since 2011.

But the trend for larger junkets, flush with cash from the gambling boom over the past decade, to diversify as a hedge against the volatile VIP gaming sector has accelerated over the last year.

New image?

Large junkets such as Jimei, which operates casinos in the Philippines and hosts golf tournaments, have moved into wealth management and securities which complement their VIP clientele base.

Neptune, which also uses the name Guangdong Group, sponsored a high-profile poker tournament this month, while Dore Holdings announced it was buying a majority stake in a Chinese pawn loan business.

Macau's junket system was created in the 1970s with the rise of Stanley Ho, an influential local businessman who opened the gaudy egg shaped Casino Lisboa.

Ho gave the junkets control of the casinos' VIP rooms, sparking a turf war in the late 1990s as rival gangs fought to dominate.

Since the liberalisation of Macau's casino market in 2002, which marked the entry of foreign players such as Las Vegas moguls Steve Wynn and Sheldon Adelson, the junket industry has been a subject of scrutiny from U.S. regulators, who allege the operators have ties to organised crime and facilitate illicit money flows.

To combat this image, Emilie Tran, a professor at the University of Saint Joseph Macau, says junkets are trying to associate with more wholesome activities such as organising community and youth events.

“Working for a junket is now seen as respectable and a job like any other,” says Tran.

The shift to sophisticated corporate entities with sizable business development, accounting and marketing teams is clearly visible. Shabby junket storefronts at the Hong Kong-Macau ferry terminal have been replaced with marble offices in prime business districts, while customised Hummer limousines owned by the operators are frequently seen parked outside Macau's newest casinos.

Big ambitions

Politics is the next phase of the junkets' makeover, says Tran, who cites the example of Suncity's Chau, who joined the Guangdong provincial committee of the Chinese People's Political Consultative Conference (CPPCC), China's parliamentary advisory body, this year.

Chau, with his dapper appearance, is often likened to a famous Hong Kong movie star. An avid tennis player and gym goer, he is frequently pictured in the local tabloids at parties.

Pollyanna Chu of Golden Resorts Group, ranked by Forbes as the 35th richest billionaire in Hong Kong, sits on the CPPCC national committee, while Hoffman Ma, deputy chairman of the Success Universe Group, sits on the Chongqing Committee of the CPPCC.

Manuel Neves, head of Macau's gaming body the DICJ, says junkets diversifying into other industries fitted into the government's attempts to wean the territory, home to 600,000 people, off the gambling industry that accounted for more than 80 percent of government revenues last year.

“For the government, when people talk about Macau, we want them to not talk about gaming. We are doing a very big effort to push the diversification. It's not an easy task,” says Neves.

Despite the move to diversify, the role of the junket is likely to remain critical to Macau’s gaming sector over the coming years, as gambling debts are not legally enforceable in China. Junkets bring in gamblers from the mainland, and then find their own ways to collect debts.

Suncity is massively expanding its gaming division, having doubled its workforce to 1,200 over the past year, but it is still short staffed.

DSL Lawyers’ Simoes believes that the increasing prominence of these junket operators will have two basic results: They will compete more and become intertwined with the casino operators and, with time, they will be as important to the gaming industry as the casino operators themselves. “The listings that they have been able to obtain are a sign of that,” he says.

“Secondly, they will have to grow into proper corporations and will be more carefully structured due to their greater role in the economy. That will also raise the thresholds to be met in terms of reporting, governance and transparency,” he adds.

As major junkets move from operating one or two VIP rooms in Macau's flashy casinos to owning their own properties, Macau's licensed concessionaires Sands, Wynn, MGM, Melco Crown and Galaxy may have to find new ways to lure customers.

“I think everybody is fighting for the customer,” says Francis Lui, head of Galaxy Entertainment. “We are doing the same thing; I am sure the junket would be thinking the same thing. We just have to offer more, a bit extra, something new, something more creative to get them to come back again.”

Meanwhile, Simoes believes that the future of junket operators remains bright, especially for those that have achieved a certain scale. “There will be no more casino operators in the near future as the government is not going to change gaming law. But there will be no limit to the number of junket promoters that could be in operation in Macau,” he says.

“However, even with that increased competition, they will still be able to grow their business and remain as the primary factor of growth for the VIP segment of the market,” he adds.

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