IAG 2006-08-09 Aug-Sep - page 12-13

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to follow through on their investment com-
mitmentsorexperiencedpaltry returnswere
Hong Kong-listed China National Resources
DevelopmentHoldingsandCreatorCapital,a
Vancouver-basedfirmpart-ownedbycasino
giantHarrah’sEntertainment.
Oneunlikelyentrant to theChina lottery
market is Hong Kong-listed Chinese People
Gas (CPG), which last October announced
it was investing in a joint venture that will
provide operating systems and mainte-
nance services forVLTs.The company is also
looking at assisting in setting up and oper-
ating VLT halls in Hainan, and has sourced
Australia’s Aristocrat Technologies as its
equipment provider in thepossibleventure.
CPGmanagement says thegasbusinesswill
remain the company’s core operation, and
while the company’s stock price had rallied
following the announcement of its lottery
aspirations, it hasbeen sliding steadily since
mid-February.
Hong Kong-listed Megainfo is in the
midst of a turbulent stock market ride due
to theChina lotteryhype,even though ithas
no lottery interests. The company describes
its principal activity as “the provision of
digital imageprocessingmanagement solu-
tions,”butunfounded rumours that itsmajor
shareholderwould inject hisChinese lottery
interests into the listedentity sent the stock
price rocketing toHK$2.05on resumptionof
tradingonAugust1,from justHK$0.04when
tradingwas suspendedon July18. It didnot
take long for gravity to take hold, however,
and thestockplunged the followingday,and
continued fallingafterMegainfoannounced
it was not in talks relating to acquisitions.
The stock closed at HK$0.275 on August
11. Commenting on the Megainfo saga, 3V
Capital’s Roger Luk advised avoiding China
lottery stocks, saying “if people don’t have
time to go to Macau [to gamble], they can
playhere.”
ThestockpricesofKantoneHoldingsand
WinWinGaminghave beenmuch less vola-
tile, even though both recently did actually
acquire China lottery interests. Hong Kong-
listedKantone investedHK$70million (US$9
million) tobuyaShenzhencompany thatde-
velopspaperless lotterysystems for itsnative
cityaswellasShanghai,andWinWinGaming
launchedasecondscratch-cardgame for the
Shanghai Welfare Lottery agency. Win Win,
which trades on the Over the Counter Bul-
letin Board in the US, receives 1.7% of the
scratch-card sales.
While most foreign companies partici-
pate in theChina lotterymarketasoperating
system suppliers, Australia-listed Sino Stra-
tegic International (SSI) functions as a sales
agent, andhas been awarded 750of Shang-
hai’s Keno sales agency permits – thanks
in large part to the political connections of
its majority shareholder, Teddy Cheng. The
Shanghai Welfare Lottery intends to reduce
thenumber of sales agencypermits to1,000
by 2007 (from around 1,600 at present), and
theobjective istoreplacestreetvendorswith
indoor salesoperationswithin twoyears.
Operating system suppliers like CLS re-
ceive0.92-1.6%of lotterysales,whereassales
agents areentitled to6-7% inorder to cover
higher operating costs, such as rental and
selling expenses. Deutsche Bank points out
that sales agents facegreater regulatoryand
operational risks. LikeCLS, SSI has ambitious
plans toexpandacrossChina.Thecompany’s
stockpricebegan2005atamereA$0.16,and
rose as high as A$4.2 last year, but retreated
toA$2.75byAugust 11.
Even thoughCLO is the only nationwide
high-frequency lotteryoperator,bothShang-
hai andBeijinghave theirownofficiallysanc-
tioned local operators.However, theGuangxi
andGuizhouprovincialsports lotteriesareof-
feringKeno,and there is a risk that other city
andprovincial governmentsmay attempt to
run theirownhigh-frequency lotteries.
Beijing and Shanghai each make up 4-
5% of China’s lottery market, and were the
first cities in the country to launch Keno
(Beijing sincemid-2004 and Shanghai since
mid-2005). The two biggest US lottery sup-
pliers have interests inShanghai andBeijing.
Shanghai’s lottery network was set up by
Gtech, while a company now part of Scien-
tificGameshandledBeijing’s.BothGtechand
ScientificGames tradeonNasdaq.
Regulatory Risks
Regulation of China’s lottery industry is in-
complete and inadequate, and there is ten-
sion between the sports and welfare agen-
cies.Corruption is alsoever-present inChina,
with the introductionofonline lotterygames
drivenby the scope forabuseof scratch-card
games,as in theBMW scandal.
Meanwhile, if high-frequency lotteries
gain inpopularityand lead toproblemgam-
bling, “the government may slow down the
roll-outorevenbanthesenewgames,”warns
Deutsche Bank. VLTs in particular have po-
tential to lead to addictive behaviour,which
is why the government has limited them to
CLOparlours,whileKeno canbeoffered in a
wider range of venues.The government has
alsosought topreventproblemgamblingby
limiting the sizeof lottery jackpots.
Meanwhile, if high-frequency
lotteries gain in popularity
and lead to problem gam-
bling, “the government may
slow down the roll-out or
evenban thesenewgames,”
warnsDeutscheBank
acau had 17 casinos in 2005, and
LVS’SandsMacaucapturedabout35%of the
city’smassmarket casino revenue that year,
leaving the other 16 trailing. Sands Macau
began its push into the high-roller market
in 2005, and according to Credit Suisse First
Boston (CSFB), raised its shareof thatmarket
from a mere 2% at the start of the year to
9.8%by theend.
From Sands Macau’s financial results,
CSFB estimates the casino is paying around
32-36% of net win as comps and commis-
sions to independent junkets for bringing in
high rollers,compared to the12-15%offered
by “local”operators andVIP promoters – in-
cluding Stanley Ho’s Sociedade de Jogos de
Macau (SJM) and Hong Kong-based Galaxy
Entertainment Group. Sands Macau needs
to offer higher commissions because, unlike
the“locals,” it does not offer credit, so forces
junket operators to bear the risk of grant-
ing credit themselves.Sands has also set the
commission high enough to entice junkets
to drop their established connections and
bring their customers to its casinos– thwart-
ing analysts’ predictions that those connec-
Sands’High-RollerPush
Not content with its domination of Macau’smassmarket, Las Vegas SandsCorp (LVS) began an aggressive
push into theVIPmarket inAugust, spurring local casino tycoonStanleyHo to accuse the company
of engaging in “vicious competition,” as JoseHo reports
tionswouldbedifficult tobreak.
In August, Sands Macau apparently fur-
ther turnedup theheaton its competitors in
courtinghigh-rollers.OnAugust11,erstwhile
monopoly casino operator Stanley Howent
before theMacaumedia to announceSands
Macau had significantly raised rolling com-
missionsthatmonth,whichhewarnedwould
trigger“viciouscompetition.”Accordingto lo-
calVIP roomoperators,SandsMacauhasbe-
gunofferingdirect rollingcommissionsof as
high as 1.2% towalk-inhigh-rollerswho are
not accompanied by junket agents. Before
the liberalization of Macau’s casino industry,
directcommissionswere rarelyoffered in the
city,withcommissionsas lowas0.7%offered
to junketagentsbySJM.SJMandGalaxynow
offer commissionsof around1%.
Stanley Ho claimed that Sands Macau’s
aggressivemove could result in the closure
of a thirdofhis150VIP roomsand the lossof
“thousands of jobs.”He also said that SJM’s
VIP revenue could drop by 20%, though he
offeredno time frame.
Stanley Ho called on the government to
intervene, and suggested the formation of
an association of casino operators. Accord-
ing toMr. Ho, with the exception of LVS, all
of Macau’s casino licensees – including SJM,
Galaxy,WynnMacau,and theMelco-PBLand
MGM-PansyHo joint ventures –haveagreed
to joinsuchanassociation.Mr.Hosaidhehad
approached LVS executives to join the asso-
ciation,but they failed to respond.
TheopeningofWynnMacau couldplace
further upward pressure on junket commis-
sionrates,particularlysinceWynnMacau’ssale
of itscasinooperatingsub-concession toPBL-
Melco forUS$900millionhasgivenWynn the
financial strength tooffergreater incentives.
Meanwhile, despitepoor results at its Las
Vegas property, LVS’ second-quarter earnings
werebuoyedby stronggrowth at SandsMa-
cau. Casino revenueatTheVenetian inLasVe-
gas fell 3%year-on-year in thesecondquarter
toUS$$71.3million–althoughcustomerswa-
geredmoremoneyon slots and tablegames,
the win percentage dropped. Sands Macau,
however, pulled the company through, with
revenue up 52.7% year-on-year to US$307.1
million. The company’s total revenue for the
quarterwasUS$517million,up29.6%.
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