IAG 2006-04-05 - Apr- May - page 10-11

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outgross SandsMacau in theyear ofMacau’s
big bang. Waldo now has 63 tables (43 of
which are in16 semi-privateVIP rooms), and
witha slewofbetter-appointedGalaxyprop-
erties set to open, will presumably not add
many more. With the mass-market clearly
not havingmademuch of a contribution to
Waldo’s revenues, the slot count was cut to
100 tomake room for theextra tables.
Theopeningof SandsMacau andWaldo,
combinedwiththecentralgovernment’seas-
ingof travel restrictionsonmainlandChinese
wishing to travel to Macau, led to the city’s
gross casinogaming revenue surging 44.3%
year-on-year in2004 (tosurpass theUS$5bil-
lionmark), as visitor arrivals surged40.2% to
16.7million.
Growthhas understandably slowed con-
siderablysincethatbigbang,especiallygiven
the lack of anymajor new casino attractions
comingonline.In2005,thegrowthofMacau’s
gross casinogaming revenue had slowed to
11.3%, and visitor arrivals rose a more sub-
dued 12.2%.Waldowas particularly hardhit,
seeing profit plunge, while Sands Macau’s
profit kept rising.Waldo’sprofit fell over 80%
to HK$13.5million in the sixmonths ended
June2005, fromHK$72.7million in theprop-
erty’sfirstsixmonthsofoperation.GalaxyEn-
tertainmentGroup announced aprofit jump
for full-year 2005, though thiswas the result
of a one-off gain from the sale of its casino
license and assets, and Galaxy’s casino rev-
enue continued sliding (see Regional Briefs,
page44).
The crowd-pulling Vegas-style Sands
Macau proved the obvious – you can create
moredemand formass-market gamblingby
giving people amore spacious, comfortable
andattractivecasino togamble in.SandsMa-
cau has not provenmuch else for now,with
the fine-dining restaurants meeting with
a miserable response, and the theatre still
standing fallow.
Waldo proved initially that even with a
lessappealinggamblingenvironment,estab-
lished connectionswithhigh-rollers through
junket operators could generate more rev-
enue. It appears,however, that thoseconnec-
tions canbefickle,withSandsMacauhaving
made considerable inroads into theVIPmar-
ket,asWaldo’s shareof themarketdeclined.
DeclineOnly byDefinition
PartofGalaxy’spoorperformancewasattrib-
uted toanoveralldrop inMacau’shigh-roller
revenue,which in turnwas attributed to the
gambling crackdown inmainland China, re-
stricting the ability of mainland officials to
gamble, aswell asMacau’s increased efforts
tocombatmoney laundering.While revenue
fromundesirablesourcesseemsdefinitely to
havedriedoff, however, the high-rollermar-
ket has – contrary to recent reports – actu-
allyexpanded.
The high-roller segment in Macau is ill-
defined. The accepted current practice is to
count only gaming revenues in VIP rooms
operated by VIP promoters as high-roller
revenue.Macau’sGaming InspectionandCo-
ordination Bureau (DICJ for the Portuguese
Direcção de Inspecção e Coordenação de
Jogos) provides statistics broken down by
the typeof game rather thanby level of play,
and until now, theVIP baccarat category of-
fered an accuratemeasure of high-roller ac-
tivity. That has changed with the arrival of
Sands Macau, which does not use VIP room
operators to conduct itshigh-roller business,
meaning none of its high-roller revenue is
capturedby theVIPbaccarat figues.With the
rapid growth in Sands Macau’s share of the
high-roller market, the gap between high-
roller andVIPbaccarat revenue iswidening.
Macau’s VIP baccarat revenue fell 3.1%
year-on-year in 2005 to US$3.5 billion, and
its shareof total gaming revenuedeclined to
62.7% from72.0% in2004.SandsMacau reg-
isteredUS$244millionof high-roller revenue
in2005 – equivalent to25.1%of the casino’s
total revenue.Taking this into consideration,
Credit Suisse calculates the high-roller mar-
ket actually grew 3.6% in 2005 to US$3.7
billion. High-rollers accounted for 67.0% of
total revenue in 2005, down 5 percentage
points from 2004. The mass-market grew a
faster 27.2% toUS$ 1.7billion, commanding
a 30.3% share of the total market – up 3.8
percentage points from 2004. Slot machine
revenuealmostdoubled toUS$152million in
2005,takingup2.7%of the totalmarket,from
just 1.5% in2004.
CreditSuissepointsout that lastyear,Ma-
cau’shigh-rollermarketsufferedaone-offhit,
when, according to industry sources, one of
the major junket organisations had trouble
issuing credit to its customers in July, lead-
ing to thatmonth’s total gaming revenuede-
clining year-on-year for the first time in two
years. Credit Suisse says that if the decline
causedby thatone-offeventwasdiscounted,
2005high-rollergaming revenuewouldhave
increased8%over 2004.
The decline in revenue from money-
laundering and corrupt mainland officials
squandering state funds is not likely to be
one-off, however. That could be partly why
Sands Macau – which due to the stringent
restrictions placed on its owner Las Ve-
gas Sands Corp (LVS) by Las Vegas gaming
regulator was unable to tap those sources
of revenue – has seen its share of the high-
rollermarketgrow.Analystshadpredicted it
would takemany years for US operators to
penetrate the market of mainland Chinese
high-rollers served by the well-established
networks of local (Macau and Hong Kong)
casino operators. Sands Macau first began
pursuing high-rollers through independent
direct junkets at the beginning of 2005,
when the casino’s share of the high-roller
market was amere 2.0%. Sands Macau has
thwarted analysts’ expectations by increas-
ing its share of the high-roller market to
9.8%by theendof that year.
Galaxy Waldo has been hit especially
hard by Sands Macau’s move into the high-
rollermarket.TheWaldo’snetgamingwin fell
by a third from HK$3.0 billion in its first six
months of operation toHK$2.0billion in the
firsthalfof 2005. It appearsGalaxyWaldohas
alsobeen forced to increase its commissions
to junket operators because of competition
fromSandsMacau.
From Sands Macau’s financial results,
Credit Suisse estimates the casino is paying
around 32-36% of net win as comps and
commissions to independent junkets for
bringing inhigh rollers, compared to the12-
15%offeredby“local”operators andVIPpro-
moters. Sands Macau needs to offer higher
commissionsbecause itdoesnotoffer credit,
so forces its junket operators tobear the risk
of granting credit themselves. Sands has
clearlyalso set the commissionhighenough
to entice junkets to drop their established
connections andbring their customers to its
casinos.
It appears Galaxy Waldo has felt com-
pelled to raise its own commission rates,
whichhaswidened thedecline inprofit from
the drop in overall revenue. Even though
GalaxyWaldo’s total win declined by a third
between thesecondhalfof2004and thefirst
half of 2005 to HK$2.0 billion, the commis-
sion and allowances paid to promoters fell
just26.9% toHK$858million.Thismeans that
commissions accounted for 39% of Galaxy
Waldo’s gaming revenue in the second half
of 2004, but 43% in the first half of 2005—
equivalent to a 10% increase in commission
paidperunitofgaming revenue.
Galaxy Waldo is likely to have offered
even higher commissions to retain junket
operators from the second half of 2005 on-
wards as competition from Sands Macau
intensified. Sands Macau increased its share
of total gambling revenue from11.6% in the
third quarter of 2004 to 21.6% in the fourth
quarterof 2005.GalaxyWaldo saw itsmarket
sharedecline from14% toanestimated8-9%
over the same period. Stanley Ho’s SJM now
hasa70% shareofMacau’sgaming revenues
and the company’s profits have continued
rising,albeit slower than thatof LVS.
TheopeningofWynnMacau couldplace
further upward pressure on junket commis-
sion rates, particularly since Wynn Macau’s
sale of its casino operating sub-concession
to PBL-Melco for US$900 million has given
Wynn the financial strength to offer greater
incentives. Credit Suisse believes the most
pressing imminent threat to Macau casino
operators is a potential hike in junket com-
mission, given the high rate of gaming tax
– 35% plus an additional 3-4% as compul-
sory social andwelfare contributions. Credit
Suisse ismoreoptimisticabout thepotential
of themass-market segment,whichGalaxy is
set tocourtover thecomingmonths.
With amere 63 gaming tables inMacau
asof January,Galaxywasnotmuchof a force
to be reckonedwith, but the operator is set
to raise its table count to 530 by the end of
theyear.
Resuming the Boom
It took several billionyears for theexpansion
of the universe to begin accelerating again
after the big bang. The deceleration of the
growth in Macau’s gaming revenue follow-
ing its big bang could conceivably reverse
as early as themiddle of this year, as several
new stars join the city’s casino constellation.
Analysts focuson theSeptember openingof
Wynn Macau, which will contain 200 tables
and 380 slotmachines in its first phase,with
an additional 300 tables and600 slots slated
to open in the first half of 2007. Galaxy will
add two big new properties before Wynn
Macauopens,however, inaddition tohaving
justopened theRioCasino inFebruary,inside
the independentlyoperatedRioHotel.
TheRiobecameMacau’s19thcasino,with
90 tables (including15 in fourVIP rooms)and
150 slots. The theme isn’t Samba, but rather
Galaxy StarWorldwill
have “affordable rates”
and a bevy of dining
and entertainment
offerings
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