Scientific Game

Direct Play

LVS has clear incentives for shifting its non-junket VIPs to Singapore

Thursday, 09 September 2010 12:23
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Asian casino gaming is growing both in terms of jurisdictional coverage and gross revenues. In the Macau market alone, revenue surged by 67.5% year on year in the seven months to July to 102.2 billion patacas (US$12.8 billion). Most of that was driven by VIP baccarat.

There are, however, strong economic incentives for at least some of those VIPs currently visiting Macau (not the ones from mainland China) to go solo and try their luck as direct players in Singapore. The sweet spot in terms of the Singapore integrated resorts attracting such players may be a matter of 20 to 30 basis points [bps] on a percentage of VIP player roll. That figure is the difference between the rolling chip commission that most Macau junkets can afford to rebate to their players (0.9% to 1% in commission out of the maximum 1.25% commission paid to them by the casinos), versus the rolling chip commission that Las Vegas Sands Corp, in its second quarter earnings call, said it can rebate to its direct VIP players at Marina Bay Sands (MBS) in Singapore (1.2%).

If LVS is going to convert a junket player to a direct one, it would rather do so in Singapore, because, according to Sheldon Adelson, the company's Chairman and Chief Executive, the price Macau high rollers are demanding from his casinos for their direct business is pushing the direct play route into being less profitable than many previously assumed. Singapore's lower taxes will also leave more wiggle room for offering incentives to players. More on that later.


First, here's a brief rundown on the rolling chip commission system in Macau as it relates to junket play. The VIP room contractors purchase 'dead' chips (nonnegotiable chips that can only be used in play) from the casino concessionaire to be resold to VIP player representatives (let's call them 'agents', though sometimes their relationship with the room operator is so close as to be virtually part of the same organisation). The room contractors receive a percentage commission on the volume of dead chips they purchased. The junket agents then sell the non-negotiable chips to players who use them in actual play.

When players win a wager with nonnegotiable chips, they are paid off in live (negotiable) chips, which can be redeemed at the casino cage for cash. In reality, they are usually bought back by junket reps in exchange for dead chips. This is the 'chip rolling' process often referred to by casino executives and industry analysts. Theoretical casino win is calculated by dividing actual win by dead chip sales. Most VIP chips are rolled on average two-and-a-half to three times per session.

In Macau, rolling chip commissions are operating on a 'pull' principal. Junkets pull them from the operators as reward for bringing in the VIPs and for mitigating risk on credit settlement, and then share them with their players. In Singapore, because the VIP players (officially so far) all have a direct credit relationship with the operators, the casinos 'push' the rolling chip commissions to players as rebates to incentivise more play.
That commission 'push' can vary depending on the size of roll of the player, but LVS says it typically expects to pay 1.2%.

In Macau, junkets 'pull' a maximum of 1.25% commission from casinos on rolling chips and pay most of it straight back to the players either in additional roll or occasionally as rebates on player losses, in the end keeping between 20 to 35 bps of the 1.25% commission originally earned in order to cover their margins. In Singapore, because MBS isn't dealing with junket middlemen, it 'pushes' the whole of the 1.2% commission it charges on VIP chips as an incentive to players. It's likely, however, that MBS is also absorbing the cost of player 'comps' in its VIP business model so that in effect the resort is paying slightly more than 1.2% to the player.

In Macau, the rolling chip commission that an operator can pay a junket is currently fixed by law at 1.25%. The Macau junkets can't give the whole of that maximum 1.25% to the player because they need to make some margin. No doubt one or two of the biggest high rollers have at some time pushed them close to surrendering their margin outright. In February, we reported some Macau junkets were offering 0.2% of a player's rolling turnover to third parties in order to convert Macau casino direct players into junket players. That doesn't leave much left for junkets already working on 0.2% to 0.35% net commission.

Over in Singapore, anecdotal reports suggest Genting at Resorts World Sentosa (RWS) is rebating as much as 1.4% to 1.5% to VIP players, including some from Japan. IAG sources also suggest Genting's motive in attracting direct players from Malaysia to Singapore is the high gaming tax in Malaysia (25% for VIP and for mass play) and political uncertainty regarding Genting's Malaysian gaming licence, which is currently being renewed by the Malaysian government on a rolling basis every three months, whereas its Singapore licence is guaranteed for at least ten years.

LVS's Sheldon Adelson said in his company's second quarter earnings call in late July that he couldn't pinpoint the rationale behind Genting's positioning if its reported commission levels on VIP play in Singapore are correct. He did, though, allude to some of the industry speculation on the motive.

"There is a lot of rationale that everybody is throwing around as to why they [RWS] are giving out at least 20 bps higher than we are giving on any one customer category. So, the biggest spread is on the last $10 million and over category," said Mr Adelson.

But he added that such commission levels were usually more characteristic of middlemen being involved.

"My inclination is to say that if [RWS's] Japan [high rollers are rebated] 1.4 to 1.5, it's certainly an indication they may have to be working with some sort of intermediary."

Inside Asian Gaming would like to point out there is no suggestion that RWS is breaking Singapore's rules on junkets by working with unauthorised agents. It's theoretically possible for VIPs to solicit a rebate equivalent to 1.4% of rolling chip turnover from the casino and then share some of that with a third party that is providing them with travel to Singapore and accommodation while in the city. VIPs are by definition people used to making deals on their own behalf.

Michael Leven, President and Chief Operating Officer of LVS, said during the LVS earnings call that the top commission rate MBS was likely to pay its direct high rollers was 1.3%.

"I think 1.2% is about where it's going to be," stated Mr Leven.

"I haven't seen any indication that it's going to go more than that, unless really big players that get some extra lift get in there. I would say 1.2% to 1.3%, something like that. Its where it is going to be."

The Macau VIP split
Theoretical house win 2.75% 2.85% 3.00%
Total amount bet by player (roll) $100,000 $100,000 $100,000
Gross amount won by casino $2,750 $2,850 #3,000
Macau govt tax @ 40% $1,100 $1,140 $1,200
Comission paid to Macau junket
(maximum 1.25% of roll)
$1,250 $1,250 $1,250
Macau casino net win
(after tax and comissions)
$400 $460 $550
The Singapore VIP split
Theoretical house win 2.75% 2.85% 3.00%
Total amount bet by player (roll) $100,000 $100,000 $100,000
Gross amount won by casino $2,750 $2,850 #3,000
Singapore govt tax @ 12%
(5% VIP tax & 7% GST)* 
$330 $342 $360
Comission (rebate) paid by casino on player roll @ 1.2% $1,200 $1,200 $1,200
Singapore casino net win
(after tax and comissions)
$1,220 $1,308 $1,440
Note * (Corporate tax is also levied on casino profits in Singapore at 17%)

An assumption behind the debate on the level of rolling chip commission shared with players in Macau versus Singapore is that high rollers would be sufficiently motivated by a differential of as high as 60 basis points (if reports of RWS's 1.5% rebates are true) to try their luck in Singapore rather than Macau.

A source familiar with the VIP trade across the Asia Pacific region says that might not necessarily be a deciding factor. It may be a case of 'the more venues the merrier' from the players' perspective.

The source said: "A lot of high rollers travel regularly around the region for business and may have a home in more than one city. For them, it may not be a choice of playing either in Macau or Melbourne, or either Macau or Singapore. It may be a case of the more the merrier. The more destinations they have to try their luck, the better."

From the operators' perspective, however, it's clearly potentially more profitable to have direct players doing most of their rolling in a low tax destination such as Singapore, than in a high tax destination such as Macau.

On $100,000 of bets placed (roll) via a junket in Macau, assuming a theoretical house win of 2.75% and less 40%
government tax on the win and 1.25% of the roll going to the junket, the casino would be left with $400. LVS said in a note to investors in June 2009 that its direct VIP play in Macau was 1.0 to 1.5 times more profitable than junket originated play. That would suggest LVS could retain from $800 to $1,000 in the above scenario were the bets placed under direct play.

In Singapore, when a direct VIP player places $100,000 worth of bets, assuming a house theoretical of 2.75%, 12% tax to the government (5% VIP gaming tax plus 7% Goods and Services Tax) and 1.2% rolling chip commission rebated to the player on his or her 'roll', the casino would be left with $1,220. Singapore also has typically lower dealer overheads than Macau. It's clear, therefore, that the economic benefit to a Singapore-based casino of direct VIP play is considerably greater than either Macaubased junket VIP play or even Macau-based direct play.

That might be why Mr Adelson said during the earnings call that his company was re-examining its strategy of heavily promoting direct play in Macau.

"We are in active discussion right now since we terminated Steve Jacobs about the wisdom of accentuating the effort for direct premium play [in Macau]," said Mr Adelson.

"We are certainly not going to eliminate it. The question is, how aggressive we are going to be to try to get it? We certainly have a lot of it in, I mean all that we have in Singapore is direct premium play."

One good reason for cutting back on direct VIP business in Macau is credit risk. As our story 'Carrots and Sticks' points out elsewhere in this edition, although in theory Macau law allows gambling debts to be pursued in its courts, in reality if the debt belongs to a resident of mainland China the courts there may not be willing to assist in the recovery process.

Mr Adelson has further reasons for falling out of love with direct VIP play in Macau. He said during the conference call that the assumption that direct VIP business could be acquired in Macau at a lower cost than junket-driven VIP business was not always correct in practice. He didn't mention that it was his own company that had set up that expectation in the market in the first place.

"The idea of getting [Macau] junket play with the expectation of lower cost has not been completely met amongst the various strata of direct premium player. Some of them are very high, and we may bifurcate part of the [Macau] direct premium play, keep some and not keep others, because the cost of this is very high. Well, in some cases, it's high. So we are reconsidering as to whether or not it's going to be worth it to keep all strata of direct premium play because I have seen several analyst reports that say, well the scuttlebutt [rumour] is that as sales chases direct premium players, a lot of the players, a lot of the junket reps are bringing their business over to Wynn."

Mr Adelson said he was surprised by the source of some of direct players coming to MBS in Singapore.

"I looked at the top 20 players yesterday and we have countries that I didn't believe we would get them from. We even get customers from Macau.

"We have Hong Kong, China, Indonesia, Vietnam, Taiwan, Korea, of course, Malaysia and Indonesia, and Thailand."

Lion City factor

Rob Goldstein, Executive Vice President of LVS, added during the earnings call that the respect in which Singapore is held regionally and internationally may also be a factor in ensuring (in the first few months of operation at least) no default by VIPs on direct credit.

"It [Singapore] is a very important country and city state. And the customers have a lot of respect for it. I have been pleased to find that people pay pretty quickly. We haven't had a credit issue yet," said Mr Goldstein.

Mr Adelson said in some of his closing remarks that industry predictions suggesting junkets may successfully register for licences in Singapore in the second half of the year were unlikely.

"I am still convinced that the Macau style junket reps will not submit to the probity checks and provide the information that the [Singapore] government will need to put them through the investigatory wringer.

And even if they do, and even if there are some Macau style junket reps that will do that, I don't believe its going to be done this year at all," stated Mr Adelson.

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