MDT Analysis | Dore’s dangers

Dore ‘investors’ handed in a petition calling for government support last week

The Dore investor protests over the last week indicate that the elements within the local investor community believe they have an implicit agreement with the Macau government.
The investors in the recent internal fraud case perpetuated by a Ms Chow, an employee at Dore, (the company is also a stated victim in this case) have indicated through their protests that they believe the government should take responsibility for their investments regardless of any lack of due diligence or understanding of investment risk on their part. At a promised rate of return on capital of 2 percent per month, or the equivalent of 24 percent per annum, a normal investor would assess their acceptable level of exposure to the commensurate level of risk that those rates of return in a particular environment entail.
These investors in Dore believe that they are owed something by someone, be it junket, casino or government, and rather than process their claims through the courts via the normal procedures, they seek not redress but demand their entitlements of a government bail-out. And so it is, in an increasingly paternalistic society. If there is anything the government owes investors is education to build financial acumen, and a stronger set of governance laws and community awareness to ensure fiduciary duties are met.
As normal business practice, companies seek to raise working capital through borrowings or attracting equity investments: junket operators do the same and given the buoyant nature of the gaming industry in Macau, they have offered attractive rates of return on such capital. The gaming industry has changed of recent times. Lower rates of return to all parties – casinos, junket operators, banks, hotels and their respective shareholders and the Macau budget – are to be expected. The Dore incident merely highlights the game change and the extent of some of the consequences.
Neither are junket operators banks; they are marketers and middle-men of sorts, and also extend credit to players. Thus, investments and debt in these businesses are not deposits, a term which connotes a higher level of capital security than “investments”. Note the prevalent and emotive use of this word ‘deposits’ rather than ‘investments’ or ‘loans’ in public discussions on this topic. We seem to forget that it was not until after the 2008 Financial Crisis that even banks would guarantee our deposits and even now the government provided bank deposit protection scheme is limited.
There are enormous consequences to the way the government responds to this event. If the government bows to these investors’ claims, more likely putting pressure on the junket or less advisedly on the casino, how far will it go in bailing out local investors? Joe Chao “deposited” a $5,000 investment on the roulette table the other day but lost it, well, you know the odds: will the government be called upon the guarantee this too? This is taking the argument to the extreme but the logical end point is not far off.
Another fear is that the government will offer a knee-jerk response to this event and put into place a stronger set of regulations that further constrain the ability of the junket operators to do business in an increasingly difficult environment. China’s tough Union Pay overseas ATM withdraw limits of 100,000 yuan per annum announced in the last few days and to be fully implemented next year will hit Macau’s main industry even harder, particularly at the mass market level. Add to this the contagion effect of this Dore incident in the liquidity squeeze on the junkets as they tighten credit to VIP players in case there is a nervous call on funds by investors, the local government cannot afford to place further constraints on companies chasing business in the casino supply chain at this particular time.