Macau casino stocks tumbled, erasing US$4.8 billion of market value in Hong Kong, as the arrest of the head of the biggest junket operator in the gambling hub revived concerns about Beijing's increased scrutiny of the industry.
Sands China and Galaxy Entertainment, the two gaming stocks on the benchmark Hang Seng Index, dropped more than 5 per cent on Monday, extending a sell-off on Friday that was spurred by the emerge of the Omicron virus strain. MGM China sank 10 per cent. The losses were much wider than the index's 1 per cent decline.
A gauge tracking six casino stocks plunged 7.6 per cent on Monday, the biggest slide since September 15 when the Macau government issued a draft on the overhaul of the gambling industry. Monday's losses amounted to almost one-third of the September rout in the casino concessionaires.
"Macau's go-go years do seem over," said Steve Vickers, a risk management consultant at Steve Vickers & Associates and a former Hong Kong policeman. "Investors in the casino businesses should manage expectations accordingly."
The casino industry's rapid expansion always depended on a degree of acquiescence in capital outflows and organised crime involvement with the junkets, Vickers added. China and Macau have now shown "an appetite for tighter control," he said.
Local authorities arrested Alvin Chau Cheok-wa and 10 others over the weekend. The alleged crime syndicate, comprising 199 shareholder-level representatives and more than 12,000 agents led by Chau, had developed a network of more than 80,000 mainland punters, according to the police in China's eastern city of Wenzhou.
Chau, 47, operates the largest gambling junket through a Macau unit he founded in 2007. Junket operators are go-betweens who bring high rollers to casinos, extending them credit and collecting interest on their debts.
Hong Kong-listed Suncity Group Holdings, a resort operator where Chau is the chairman and controlling shareholder, was halted from trading on Monday. It fell 7.3 per cent on Friday. Its unit Summit Ascent, which operates casinos in Russia, was also suspended.
Suncity's junket revenue will probably drop by 30 to 50 per cent in coming weeks, according to JPMorgan Chase, calling the detention "really bad" for the industry. Suncity accounts for about 45 per cent of the junket market, or 15 per cent of Macau's total gross gaming revenue in 2019, it said.
Shares of Sun Entertainment Group, a filmmaker and funeral services provider that is also controlled by Chau, tumbled by as much as 62 per cent on Hong Kong's board for smaller growth companies, before ending 31 per cent lower on Monday.
Macau's casino stocks sink in regulatory overhaul that wipes out billions of market value
"The board wishes to emphasis[e] that the news coverage is relating to the personal affairs of Mr Chau," Sun Entertainment said in a filing late Sunday. "The board is of the view that the incident does not have any material impact on the financial position, business nor operation of the group."
This is the second time this year that Macau's casino stocks have been walloped by the regulatory crackdown. On September 15, some US$17 billion in market capitalisation was wiped out from the stocks in a single-day drop of 23 per cent after the former Portuguese colony unveiled a plan to tighten the grip on the sector, including the appointment of government representatives.
Chau's arrest is a fresh reminder to investors that Macau's gambling industry, which contributes to about 80 per cent of the city's tax revenue, still remains a focus for Beijing's top leaders. The casinos, which are banned in the mainland, have been blamed for being a conduit for money laundering and capital flight.
Beijing has been make efforts to reduce Macau's reliance on the industry. Under the Greater Bay Area scheme that also comprises Hong Kong and nine cities in Guangdong province, Macau aims to be transformed into a world-class leisure centre and a commerce and trade cooperation service platform.