Is Wynn Macau casino a victim of the latest Chinese corruption crackdown?

February 1, 2013
February 1, 2013

Macau, a former Portugese colony in southern China, is the only place in the country where gambling is legal, and it boasts the world’s biggest gaming market. Its casinos’ VIP rooms attract high-rolling Chinese businessmen and government officials. They have long been linked with suspected money laundering, and seen as places where Chinese nationals illegally convert large amounts of the tightly controlled yuan into foreign currency.

Wynn Macau, the Hong-Kong-listed unit of gambling giant Wynn Resorts, has never been accused of aiding or permitting such activities. But in the wake of renewed Chinese government efforts to step up oversight of money transfers in the gaming enclave, the casino has just reported some rather disappointing results: an 18% quarterly net profit decline (pdf) after revenues from its so-called “VIP” casino tables slumped almost 7%.

Macau gaming revenues overall have been booming. Operators other than Wynn have done well. In its recent fourth quarter results, Las Vegas Sands reported robust earnings in Macau. Operating income at Sands’ flagship Venetian casino in the Chinese territory rose 23% on the same period a year before. At its Four Seasons resort, operating income rose 57% for the fourth quarter of last year.

So why would Wynn be doing worse? In a call with US analysts about the results, founder and CEO Steve Wynn blamed the downturn in Macau profits on increased competition from rivals.  “The boys down the street got smarter,” Wynn said, referring to rivals building new and better resorts in the Chinese enclave.

But his company may be trailing its competitors because it relies more heavily on VIP customers in Macau. “Wynn Macau is lagging its peers, primarily due to its limited exposure to the mass market,” Lantis Li, a Hong Kong-based analyst at Capital Securities told Bloomberg. “Wynn Macau has only one property in the peninsula and it has been relying on the VIP business.”

These high rollers, fearing scrutiny from Chinese authorities, could be giving Wynn a wide berth after the company got attention in a recent round of money-laundering-related arrests. According to Reuters, at least six agents who operate so-called “junkets”—Macau tours run by firms who get commission from casinos for bringing in mainland Chinese “VIP” gamers—were arrested on Wynn’s premises last December. (A Wynn Resorts spokesman in Las Vegas did not return an email seeking comment by press time, while a Hong Kong spokesman could not be identified.)

The junkets can help Chinese nationals, who are not allowed to take more than US$50,000-worth of Chinese currency out of the country per year, get around the restrictions. Before heading to Macau, VIP Chinese gamblers borrow a certain amount of cash from their junket agent. On arrival in Macau, they are given the borrowed money in the form of “dead” casino chips that cannot be exchanged for cash. When a gamer wins a bet from playing his dead chips, however , he is paid in cashable chips which he can exchange for foreign currency inside the casino.

Recent press reports have also highlighted links between Macau gambling and corruption. Yang Kun, a vice-president of state-owned lender Agricultural Bank of China who has been detained by the Communist Party’s corruption watchdog, reportedly owes Macau casinos 3 billion yuan ($477 million). And Chinese prosecutors building a case against disgraced former Chongqing party chief Bo Xilai are investigating whether he laundered money through Macau. This 2009 cable from the US consulate in Hong Kong, part of the trove unleashed by Wikileaks, said the junkets “allegedly work closely with organized crime groups in China to identify customers.”

Incoming Chinese president Xi Jinping is making a lot of noise about cracking down on corruption. This has hit revenues of some companies whose products are popularly bestowed on government officials by businessmen seeking favours. Switzerland’s Compagnie Financière Richemont, maker of Cartier timepieces and jewelry and Montblanc pens, posted worse-than-expected quarterly sales numbers earlier this month after revenues at its all-important Chinese segment flat-lined.

The US government, too, has also had its eye trained on the relationship between Macau casinos and VIP junket operators for some time. A US State Department report said in March that Macau is “popular among gamblers seeking inscrutability and alternatives to China’s currency movement restrictions.” And Las Vegas Sands is reported to be under investigation by US authorities for money laundering.

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