Media & Gaming, Talking Point

A losing hand

Macau’s casino sector stunned by the arrest of its top junket boss


Alvin Chau: the Macau gambling kingpin and China junket supremo was arrested this week

Different casino companies lay claim to the status of the largest gambling firm. Spanning at least 600,000 square feet in area, the WinStar World in Oklahoma wins the title by floor space, for instance. Las Vegas Sands used to be the biggest casino operator by market capitalisations, before a nearly 40% slide over the last two quarters, partly triggered by the risks of a regulatory overhaul in its biggest market in Macau. Online bookmaker Flutter Entertainment, created by the merger of Paddy Power and Betfair, grabbed the top spot earlier this year.

In terms of the amounts of money that it brings to the tables, Suncity has a claim to being the biggest of them all, however. The junket operator was widely reported this week to account for as much as 40% of Macau’s junket market or about 15% of the city’s gaming revenue. (Before the pandemic in 2019 Macau’s casinos generated nearly $37 billion in revenue, or six times that of Las Vegas.)

Perhaps this underlines the amplitude of the shockwaves sent through the industry this week when Suncity’s boss Alvin Chau was seized by Macau police a day after authorities in mainland China had accused him of backing an illegal gambling operation.

His detention comes at a turbulent time for the Covid-stricken casino sector in the city. All eyes are now on what the arrest might mean for a gaming market already set for a shakeup when the six gaming concessions expire next June.

Who is Alvin Chau and what are the junket operators?

Born in 1974 in Macau, Alvin Chau Cheok-wa has featured regularly in the financial and entertainment news (in part due to a much publicised extramarital affair with a popular model). Allegations about his links to triad groups have also been a subject of gossip. Back in August 2019, Suncity’s Hong Kong-listed sister firm Suncity Group even felt the need to issue a statement clarifying that Chau wasn’t being investigated by the Australian authorities, for instance. The announcement came after newspapers had reported that he had been barred from entering Australia on concerns that the 47 year-old was linked to triad activity in Hong Kong. A spokesman for Suncity refused to comment further, beyond telling reporters that the allegations were “private and personal matters of Chau”.

Chau has never rebuffed local media reports about his triad ties, with Hong Kong’s now defunct Apple Daily once describing him as “the idol of young gangsters everywhere” because of his personal wealth and celebrity lifestyle.

The same newspaper reckoned that Chau started out as a junior employee of triad boss Wan Kuok-koi. Wan, who is better known by the nickname of ‘Broken Tooth’, was a major figure when Macau was still under Portuguese rule, claiming in an interview in 1998 that he had at least 10,000 men working for him.

A year later Macau was returned to Chinese sovereignty and Broken Tooth was sentenced to 15 years in jail (released in 2012, the gangster was targeted with US Treasury Department anti-corruption sanctions in late 2020).

By then Chau had outgrown his ‘big brother’ in terms of the commercial success of his junket operations in the city. Junkets are sometimes referred to as VIP promoters and they act as middlemen for the casinos in bringing Chinese punters on trips to the city. Apart from arranging travel and accommodation for their customers, the junkets coordinate the credit lines for them to gamble in Hong Kong dollars at the tables, in financial arrangements that can be repaid in Chinese yuan or other assets on the mainland.

Chau’s Suncity junket operation is said to have introduced as many as 60% of Macau’s high-roller players to the city’s casinos at its peak, hosting many of them at its own VIP rooms in the gaming enclave.

Suncity Group – a separate business to the junket operation – grew out of Chau’s success. It has invested in a series of hotel and casino projects, including the Hoiana resort in Vietnam, the Tigre de Cristal in Vladivostok in Russia, and a $1 billion hotel-casino project in Manila in the Philippines.

Suncity Entertainment, another Hong Kong-listed firm controlled by Chau, has invested in dozens of popular movies as well, such as Poker King in 2009 and Operation Red Sea in 2018.

How has Chau fallen foul of the authorities?

Police in Wenzhou, a city in eastern China known for its shadow banking sector, put out an arrest warrant for Chau on November 26, accusing him of offering gambling activities in mainland China (gambling is illegal in China, except in two special administrative regions: some sports betting takes place in Hong Kong, and Macau has its gaming sector).

According to the warrant, the authorities started investigating Chau’s cross-border gambling syndicates in July last year. The suspicion was also that he had been running a number of online gambling platforms from places such as the Philippines and linking them to his junket operations in Macau.

In fact Chau is said to have experimented with “online casinos” since the early 2000s, setting up platforms that broadcast the gambling sessions that he operated. VIP clients unable to make the trip personally to Macau (including government officials, perhaps, who are forbidden from entering casinos) could then make their bets online.

From this innovation, Chau grew his operation to a much bigger scale. The Wenzhou police allege that this “criminal syndicate” developed into a pyramid-like network, with 199 “shareholder-level agents”, 12,000 more junior junket staff and more than 80,000 customers.

“[Chau] set up an asset management company in mainland China to provide services for gamblers to exchange assets for gambling chips, helped to collect gambling debts, assisted clients in cross-border capital exchange, and used underground banks to provide gamblers with fund settlement services,” prosecutors claimed.

“The case involves a tremendous amount of money and seriously affects the social order of our country,” the Wenzhou police continued, urging Chau to surrender in a bid to secure more “lenient treatment”.

The Macau government took action just a few hours later by arresting Chau and 10 other people on allegations of membership of a criminal group, money laundering and illegal gambling. After a 14-hour interrogation, he was transferred to the local prison (a photo of his Porsche parked outside a police station soon went viral too).

Local police later explained that a special unit was set up in April to take on the case after they received intelligence from mainland authorities. The investigation was focused on illegal overseas gambling platforms that had been set up by a syndicate via its VIP junkets in Macau, they added.

What was the wider market reaction?

As of Wednesday this week Hong Kong’s stock market had dropped more than 3.5% over the previous five trading days – a correction triggered mainly by concerns over the spread of the Omicron Covid-19 variant.

But the arrest of Macau’s top junket operator forced shares in the gaming sector down much further, with panic selling in casino stocks like Sands China, Wynn Macau and MGM China.

The Hong Kong Economic Times said the selloff had wiped out more than HK$36 billion ($4.6 billion) in market value in a single day.

Suncity Group was suspended from trading on Monday and its share price plunged nearly 50% when trading resumed on Tuesday. The shares were soon suspended again as the company scrambled to contain the damage, confirming in a circular that Chau had been arrested on allegations of illegal gaming and money laundering, and then reporting that he is prepared to resign from his positions as chairman and executive director.

Suncity denied that its Tigre de Cristal resort in Russia, close to the border with northern China, had any involvement in illegal gambling, but it acknowledged that the group’s wider operations were dependent financially on Chau and his connected companies, and could be adversely affected if the group were to lose his support “for whatever reason”.

In another announcement, Suncity said all of its VIP clubs in Macau had closed as of Wednesday this week.

Why target Chau and his junket business now?

The allegations against Chau are hardly ground-breaking: he was castigated by Economic Information Daily, a newspaper run by Xinhua news agency, in the summer of 2019 for running an “incredibly large” online platform that targeted gamblers in mainland China.

“Its gaming revenue tops Rmb1 trillion every year, which is twice as much as the entire [state-run] lottery sales of China,” the newspaper claimed. “Experts describe the gambling network as China’s ‘biggest opium poppy’. It is a grave threat to financial security and social order, which should be dealt with by regulators.”

The article went viral as other state media outlets shared it on social media, although Chau and Suncity quickly denied the allegations.

Until the details in the allegations become clearer, it’s hard to know whether the impact of Chau’s arrest is going to be more isolated to Suncity or whether it signals that something has changed more widely for the industry.

However, Macau’s casino operators have been nervous about their prospects for a while, with casino shares coming under pressure in the lead-up to a government consultation process on how to regulate the industry better. The city’s six gaming concessions are all due to expire next June and there is little clarity on the number and duration of the future licences. The authorities are also said to be looking into changes that could require concession holders to seek approvals before distributing dividends and there has been speculation that fractious relations between Beijing and Washington might weigh on the results of the review, with three US gaming firms (Sands, Wynn and MGM) controlling about half of the Macau market.

In this kind of context Chau’s arrest could be interpreted as the loudest warning shot yet for the sector, says Ben Lee, managing partner at consultancy firm IGamiX. The arrests are “much more clear cut in terms of what China intends for Macau going forward” than the threat of regulatory changes, Lee told Bloomberg this week, predicting more of a clampdown on efforts to promote Macau’s casinos to customers inside China.

“They are more concerned about stopping any leakage of funds from the economy, and the Macau gambling industry has always been a black hole,” he added.

These changes could mean an end for Macau’s junkets?

The authorities in mainland China have been making life more difficult for the junkets for some time, with intermittent rounds of investigations and arrests that have contributed to a steady decline in the share of VIP revenue at the casinos.

Macau’s Gaming Inspection and Coordination Bureau reported 85 licenced junket groups as of January this year – a major decline on the hundreds of VIP organisers that operated in the city a few years ago. However, the number of junkets seems set to wane further as the Chinese government gets tougher on grey area activity, such as offers of credit and cross-border transfers of funds for players, which will torpedo much of the junkets’ appeal to their clients.

What also seems likely is that regulators will push for Macau to manage the surviving junkets in a similar way to the casino sector in Singapore, where there is much more government regulation and oversight.

As part of this process Macau could see a speedier shift to customers from the ‘direct VIP’ and ‘premium mass’ channels in which the casinos have direct relationships with the wealthier players, rather than relying on middlemen to bring them the business. That’s actually a higher-margin outcome for the casinos as they don’t have to pay commissions to the junkets on the chips that are wagered.

Casino bosses in Macau have been busy downplaying the potential impact of the Suncity saga this week, pointing out that the contribution from the junket operators to their overall revenues has been declining.

Chau’s exit might be seen in more positive terms by some of the incumbents as well, if the allegations about his helping high rollers to bet in casinos outside Macau turn out to be true.

In the shorter run the collapse of Suncity’s operations will close off an important source of business, however, and brings more bad news for the casino firms amid a huge drop-off in customers because of Covid-19. Quarantine requirements have deterred millions of visitors from coming to Macau, with gaming revenues down more than two-thirds on pre-pandemic levels.

In these challenging conditions, the casino licence holders are hoping that their concessions will be renewed, or at least extended for another 12 months, to allow them a wider recovery from the worst of the pandemic. Macau’s chief executive Ho Iat-seng seemed to hint at this as a possibility last month when he talked about the challenges of revising the gaming laws and completing the tender process for the new licences on the planned schedule, implying that the current concessions could be extended beyond their existing expiry date.

In fact, prior to his arrest Chau was reported be interested in bidding for one of the gaming concessions in next year’s reshuffle, playing on the fact that, as a Macau resident, he would offer a local alternative to foreign investors such as Wynn and Sands.

That looks impossible now. Chau’s bigger concern is what happens next in the various charges that have been levelled against him and whether he will be transferred to mainland China to face trial. Even if his prosecution stays in Macau, he could face at least 10 years behind bars, the local media reports.

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