Macau Casino Stocks Sink After Police Arrest City’s Junket King

Macau’s casino industry is under scrutiny again with the arrest of the head of the world’s biggest junket operator.

The detention of Suncity Group Holdings Ltd. CEO Alvin Chau marks the first time such a high-profile figure in the gaming industry has been targeted. Macau’s judiciary police said Sunday that Chau confessed to establishing overseas gambling platforms and carrying out illegal virtual betting activities. Junkets service high-rollers and extend credit to them.

The news sent shares of casino operators tumbling. MGM China Holdings Ltd. sank 10%, while Wynn Macau Ltd. closed 7.8% lower. Sands China Ltd. and Galaxy Entertainment Group Ltd. lost more than 5%. Suncity suspended trading in its Hong Kong shares on Monday.

Although high-rollers have become less important to casinos in Macau, accounting for just 15% of earnings in 2019 according to Citigroup Inc., the arrest comes as investors and analysts alike had turned more bullish on the industry after a brutal year. A Bloomberg gauge of the city’s six large operators entered a bull market this month, and Credit Suisse Group AG and JPMorgan Chase & Co. recently upgraded their ratings for the sector.

In notes published after the warrant was issued, JPMorgan and Citigroup analysts said the arrest will hurt investor sentiment toward the industry, although they played down the impact on casino earnings.

“A near-term share price correction could present an enhanced buying opportunity,” Citi’s George Choi wrote in a report, citing the industry’s fading reliance on junkets and positive catalysts such as a potential reopening of border with Hong Kong.

The VIP segment is likely to account for just 1-4% of operators’ earnings in 2023, JPMorgan analysts led by DS Kim wrote in a note dated Saturday.

China has been clamping down on activity by VIP punters in Macau in recent years over concerns that the high-stakes betting there -- which takes place in convertible Hong Kong dollars -- can sometimes be an illicit channel for currency outflows and money laundering. Beijing has also cracked down on organized gambling trips to Macau and other overseas destinations organized by junkets amid a wider effort to discourage casino gaming.

“Mr. Chau is arguably the biggest (and certainly most famous) figure in the junket industry, as the founder/CEO of the undisputed biggest junket in the world,” JPMorgan’s Kim wrote. “So the fact that even he can be arrested – for just running the junket and doing (what seems to us like very) normal junket activities – should send a chill down the spine of any and all junkets, in our view.”

Macau casinos have been under a shadow since September when city officials said they were considering regulations to tighten restrictions on the industry, including appointing government representatives to “supervise” companies. The gauge of casinos tumbled a record 23% in a single day amid concern the sector would face a similar crackdown to those affecting the tech and real estate industries. Macau is the only place in China where gambling is legal.

News of Chau’s arrest warrant, which came after Hong Kong trading hours last week, sent Melco Resorts & Entertainment Ltd. plummeting 10%, Wynn Resorts Ltd. 6% lower and Las Vegas Sands Corp. down more than 5% in U.S. trading on Friday.

Wynn Macau’s 2028 bond was indicated at 92.4 cents earlier on Monday, down 3.7 cents on the dollar, the biggest drop since Sept. 15, Bloomberg-compiled prices show.

The gauge of Macau casino stocks is still down 44% this year, on pace for the worst annual performance since the China stock bubble burst in 2015. Shares also tumbled on Friday amid concern the emergence of a new coronavirus strain will curb earnings.