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VIP system to “scale down” in coming years leaving base mass to lead Macau recovery: Credit Suisse

A concerted tightening of regulatory controls against gambling by mainland Chinese authorities looks set to counter expectations of a VIP-led recovery for Macau’s gaming operators, leaving base mass to do the heavy lifting according to investment bank Credit Suisse.

In a Monday note examining the short-term outlook for Macau post-COVID, analysts Kenneth Fong, Lok Kan Chan and Rebecca Law described the VIP segment as being under serious pressure with a number of key factors looming for Macau’s gaming market.

Despite gaming stocks reflecting strong investor sentiment, Credit Suisse believes Macau’s recovery may take longer than expected due to “structural pressure” being placed on the VIP system.

“We believe the VIP system will substantially scale down over the next few years, dragging the pace of recovery,” the analysts said, predicting a 77% year-on-year GGR decline in 4Q20 versus consensus of 30%.

They also estimate that Macau gaming revenues will remain 9% down on 2019 levels through 2022, negatively impacted by China’s latest crackdown on cross-border currency movement as it relates to gambling.

“Unlike in 2010-14, when the central government had targeted corruption, this time around Beijing is targeting gambling activities,” they said.

“This hurts big players demand, affects junket debt collection and blocks funding channels for big players. According to the State Council Information Office, it could be a three-year campaign until 2022.”

In the meantime, Fong, Chan and Law suggest Macau’s operators will have no choice but to focus on grind mass, rather than VIP or premium mass, to claw back revenues.

“Without a healthy VIP junket system, casinos would lose one of the key sources to grow their premium mass players, as these players lost one of their major channels to move money (~30% of their gambling funds go through the VIP system),” they state.

“A base-mass-led recovery without any meaningful uptick in money spent would lower casinos’ profitability, and the new supply (3 new projects in 2021) would take the market longer to absorb.”

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