Gross, Damned Gross and Statistics
Figures for aggregated gaming revenue are fun but can be misleadingThursday, 15 October 2009
Everyone loves statistics and league tables. So the latest unofficial figures on gross gaming revenue (GGR) for Macau in September have got the industry abuzz.
According to Lusa, the Portuguese-language news agency, Macau's GGR for September 2009 grew 53% year on year (i.e., compared to the equivalent month in 2008). By that reckoning, the autumn holiday season really was one of mellow fruitfulness.
The figures reported by Lusa suggest the territory's casinos and their games of fortune brought in 10.8 billion patacas (US$1.35 billion) during that month. This echoes the runaway revenue growth seen in the first half of 2008 before China's visa restrictions and the international financial crisis spoiled the party.
September does include the run up to the National Day holiday on 1st October which this year was a truly bumper event marking the 60th anniversary of the founding of the People's Republic of China. Nonetheless, if this September's revenue growth pattern were to be the harbinger of a trend for the rest of the calendar year, it would in likelihood more than make up for the sluggish performance seen between January and the end of August. In that period, Macau's GGR was down around 2% compared with the same period in 2008.
In terms of operator market share for September, Dr Stanley Ho's casino company SJM stayed in top spot with its share up 4% to 30%—a three month high. Las Vegas Sands Corp was in second spot with 20%—down 4% on August. Melco Crown Entertainment continued its strong performance, seen since the opening of its Cotai resort City of Dreams, with a 16% share, the same as in August. Wynn took fourth place with 14%, up 1% on the previous month. Galaxy held at 10% for the third straight month in fifth spot, while MGM GRAND Macau slipped back from its strong summer performance seen in July, when it peaked for the year at a 12% share of the gross. It scored 8% in September, according to the unofficial Lusa figures.
No serious student of the Macau casino industry expects market share on gross gaming revenue to tell the whole story or even part of the whole story. The figures are, however, seen as a reasonable snapshot guide on how the local sector is doing as a whole and how the individual concessionaires are performing relative to each other.
The perfectly understandable buzz created around the release of GGR figures shouldn't distract observers from some other important structural issues. Those issues relate to the business model of VIP gaming.
Because VIP rolling chip volume has such an important role in calculating GGR in Macau, the loss of one or two big players by a particular casino can have a significant impact on its market share. Of course, the loss of any one player by one casino constitutes a competitive advantage gained by another casino (assuming the player hasn't left the market entirely through lack of liquidity, insolvency or an appointment with a branch of the People's Court on the Mainland). If, however, an operator's share of the gross yo-yos back and forth from month to month, that doesn't necessarily indicate a trend in terms of the quality of that particular casino's facilities. It may be more about VIP agents flip-flopping between casinos to look for the best commission deal—which those agents may then pass on in part to their clients in the form of incentives such as discounts on losses.
There may, however, be a qualitative difference between the operators in Macau that is reflected in the market share element of the GGR figures. A recent study by Hong Kong Polytechnic University suggests SJM does well in Macau because it's a Chinese company and its customers are mainly other Chinese people. To sum up the findings of the study as if it were an exercise in speed dating is to do something of a disservice to the authors, but that's essentially the point they make.
As they put it: "Asia Pacific-based casino brands in Macau outperformed their US-based counterparts in terms of customers' perceived quality, suggesting the need for US-based casino brands to better cater for the needs of Macau casino visitors and to localise their services."
The topic of catering for the needs of visitors and localising services raises discussion of the most obvious shortcoming of GGR as a market indicator in Macau. It doesn't, by its nature, take account of all the discounts and commissions paid to players and/or agents in exchange for the players' patronage. In a high-volume, low-margin segment such as the Macau VIP baccarat trade (which accounted in the second quarter of this year for 64.1% of the gross), the price a casino is paying for its business is an important element in establishing true investor value. A difficulty is unless the individual investor or investment institution has a real insight into senior management's thinking on discounts and commissions, then they can expect a long wait if they're hoping to see it written down in black and white on the balance sheet.
Another key point is that in the VIP-based Macau market with its focus on gambling credit, gross gaming revenue is not the same thing as money in the bank—either for the operator or the government.
It's been reported that Macau is allowed to compute its gross gaming revenue based on play facilitated by credit during a particular reporting period. This is regardless of whether that credit has been honoured and the debt collected during that same reporting period. Under that kind of accounting regime, it's difficult for investors and the market to get a handle on levels of bad debt. Is the monetary value of the play really held within the formal accounting system of the casino industry, or is the value held only notionally in the ledger of a VIP agent?
Given the way that Macau's gaming gross is calculated, the significant year on year rise in the September GGR figures may be more a function of an improving credit market for high rollers than it is about how much money the industry has made for investors and the community.
Macau's gambling agent system—whereby a gambling debt is not contracted directly between the casino and the player, but between the player and a third party (or even a fourth or fifth party)—makes it hard for the market to track the performance of those debts.
Even with so-called direct play in Macau, where a gambling credit agreement is contracted directly between the player and the operator, the assumption that such a debt is enforceable in law is subject to question.
When Wynn Macau took a high roller to court in Hong Kong recently in pursuit of a HK$30 million (US$3.87 million) debt allegedly contracted in Macau and Las Vegas, the man's lawyers argued he was not liable to be exposed to summary judgement. They said this was because the credit agreement had not been signed off by the Gaming Inspection and Co-ordination Bureau, Macau's gaming regulator. Advocates for Wynn countered that such a sign-off related to the contractual relationship between the casinos themselves and VIP agents, not to direct loans from casino to player.
In any case, when it comes to computing the economic value of the gaming revenue gross, most US casino regulatory regimes say that credit-based play—often referred to in the US under the 'markers and credit instruments' heading—should not be included in a casino's winnings until the credit has been honoured (i.e., any losses paid) by the player. Such credit-based revenue appears instead on a casino's balance sheet in parentheses under the heading 'net credit play adjustment'. In this way, investors can judge the health of the business because the credit-based play is in effect noted as a receivable. Once the credit has been honoured, the brackets are removed, and the revenue is recorded in the relevant period's balance sheet.
It's possible to argue that because US casinos issue credit direct to players with no third party agents, it's easier to maintain some transparency in the system and for regulators to police it.
Some US states even create tax incentives for casino operators to deflate gross gaming revenues. New Jersey's Casino Control Act, for example, says casino licensees are for tax purposes "entitled, subject to certain limitations, to take a deduction from gross revenue for the value of promotional gaming credits wagered by patrons in slot machines".
Despite all the caveats and health warnings attached to any discussion of gross gaming revenue in Macau, it may in the end be the only effective way of judging the market's overall trajectory and operators' performance relative to each other. With other indicators such as operator EBITDA, the statistical waters are muddied by the differing accounting protocols used by the operators—a legacy of their accounting practices in home or core markets.
The American Gaming Association, the educational and lobbying body of the commercial casino entertainment industry in the US, describes GGR as "a true measure of the economic value of gambling." That may be true and very useful for government and society at large. But in the end, investors want to know not only about sales, but also about profitability. We won't know that until the raw data of the GGR has been sifted and the credit 'wheat' separated from the credit 'chaff'.