(Bloomberg) -- The tide turned swiftly on Friday in Suncity Group's VIP rooms across casinos in Macau, where millions of dollars are bet on blackjack and baccarat every night.
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As the news broke that Chinese authorities had issued an arrest warrant for the company's chief executive officer, Alvin Chau, high-rollers scurried to leave, fearing police raids on the exclusive arenas that have helped make the Chinese territory the largest gambling hub in the world.
Suncity's gaming rooms were near-empty this past weekend, with punters not wanting to be associated with Macau's biggest junket operator, according to people familiar with the matter who didn't want to be identified. Chau was detained by police on Saturday. By Monday, Suncity's stock was suspended and casino operators' shares in the U.S. and Hong Kong were sliding.
When they resumed trading Tuesday morning, shares of Suncity's listed arm, which doesn't include its junket operation, plummeted 48% in Hong Kong.
The arrest of Chau -- one of the most high-profile figures in Macau's gambling world, whose love life is a favorite topic of the Hong Kong tabloids -- sent shockwaves through an industry already under siege from growing government intervention. In some ways, it was seen as a bigger blow to Macau than proposed law changes aimed at bolstering oversight of casinos which less than three months ago wiped $18 billion off gaming stocks. The final contours of the law are not yet known, but the message sent by Chau's arrest was unmistakable.
His detention is "much more clear cut in terms of what China intends for Macau going forward" than the legislative proposal, said Ben Lee, a Macau-based managing partner at consultancy firm IGamiX. The underlying message is that the territory's gaming industry shouldn't promote itself in mainland China and operators should focus on developing more non-gambling elements to attract visitors, he said.
In essence, that means the disappearance of a shadowy industry -- the junket network -- that channels some three-quarters of Macau's roughly $3 billion in annual VIP gaming revenue by bringing Chinese punters on trips to the territory, wooing them with private jets, hotel suites and, crucially, credit lines to gamble in Hong Kong dollars that can be repaid in Chinese yuan or with assets. Chau's arrest indicates this whole practice is in Beijing's sights.
"We are seeing signs of China's economy slowing down. They are more concerned about stopping any leakage of funds from the economy, and the Macau gambling industry has always been a black hole," said Lee.
The probe into Suncity has led to the arrest of 11 people, including Chau, for establishing overseas gambling platforms, carrying out illegal virtual betting activities and money laundering.
Suncity accounted for more than 40% of Macau's junket market, or about 15% of the city's gaming revenue in 2019, according to JPMorgan Chase & Co analysts including DS Kim. They predict that Macau's junket-driven VIP revenue pile could contract by half in the coming weeks. By 2023, the VIP sector may only drive about 4% of casino operators' earnings, they estimated, compared to 15% in 2019.
The Communist Party -- which bars casinos on the mainland and has long disapproved of gambling -- has been laying the groundwork for the dilution of Macau's reliance on gaming for some time. Beijing wants the former Portuguese colony to become a center of leisure and tourism, which means sports stadiums, convention centers and traditional Chinese medicine parks instead of more baccarat tables. But the ties have been hard to break.
No Official Ties
The enclave's six casino operators have no official links with junkets like Suncity, but have relied on them for decades to bring in high rollers: around 35% of their $68 billion in gaming income came from the VIP segment this year.
Without junkets, Macau casinos could suffer a 34% decline in gaming revenue and an 8% drop in profit, assuming some of the VIP gamblers will bet less and become part of casinos' so-called premium mass clients, according to Bloomberg Intelligence analyst Angela Hanlee. But cleaning up the industry could ease the risk of future regulatory crackdowns, helping the long-term valuation, she said.
Investors, however, are anxious about the short term. After Macau's judiciary police said Sunday that Chau confessed to some of the allegations against him, an index of six casino operators tumbled 7.6%, the most in over two months, wiping out billions of dollars in combined market value.
The BI gauge of Macau casino shares has slumped 50% over the past two years as operators endured blow after blow: first the pandemic cutting off Chinese visitors, then the proposed law changes that will tighten Beijing's oversight over profits and operations. Now, what appears to be a renewed junket crackdown.
While Macau is the only place in China where gambling is legal, many junkets have operations on the mainland to solicit gamblers, collect debts and help clients move money across the border through means such as swapping assets for casino chips.
China has been upping scrutiny of junkets over the past decade with intermittent arrests of agents, resulting in VIP revenue steadily trending down. Some smaller junket operators have already stopped using mainland Chinese agents to help promote gambling and no longer provide credit lines for clients, according to people familiar with the matter. Instead they now behave like tour operators, arranging transportation, hotels and dining, the people said.
The pandemic -- which effectively erased Macau's chief source of revenue -- has hammered the industry. Casinos had their worst month of the year in October with gaming revenue down 40% to 4.37 billion patacas ($545 million) from a year earlier. Revenue has fallen 83% from pre-pandemic levels in 2019.
It's a far cry from Suncity's peak period circa 2013, when the company's VIP rooms in one month saw more than HK$180 billion ($23 billion) pass through. Suncity said Monday that the company, its subsidiaries and staff aren't under investigation in connection with Chau's arrest, but that its business and operations will be adversely affected if it loses the financial support of Chau, who intends to resign as chairman and executive director.
The fact that a figure like Chau can be arrested "for just running the junket and doing normal junket activities -- should send a chill down the spine of any and all junkets," JPMorgan's Kim said in a note on Nov. 27.
(Updates with Tuesday stock move in 4th paragraph.)
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