Inside Asian Gaming

INSIDE ASIAN GAMING | May 2008 12 result of luck, which cannot be relied upon to continue. The bull stands out While we have insinuated that an operator’sreportedexpectedwinpercentage may not always reflect that operator’s actual expectation,it is notable thatmild-mannered Galaxy Entertainment Group gave an expected range of 2.7% to 2.9% in Q4 2007, even though it was particularly lucky in the quarter, enjoying an actual win percentage of 3.3%. Ever-bullish Las Vegas Sands Corp (LVS), on the other hand, does not offer a range of values for expected win percentage, opting to provide a single value instead. In Q4 2007, that value was 3.0%, giving LVS the biggest expected win percentage in the market, although its properties presumably do not have any unique inherent edge over players. Perhaps LVS just felt it fitting to have the biggest expected win percentage in order to complement the city’s biggest casino and construction pipeline. The aggressive expectedwin percentage is a reflection of the lofty expectations LVS is trying to create for its projects, especially since its actual VIP win percentage for the quarter came in at a rather average 2.72%. LVS thereby wants us to believe that its Q4 2007 VIP revenue would have been better, had it not been for a run of bad luck (even though 2.72% is within most other operators’ expected range). Unless all the Cover Story when VIP baccarat revenue declined 3.1% in 2005 following Beijing’s crackdown on Chinese government officials and heads of state owned enterprises gambling in Macau, while the mass market soared 48.2%. Since then, however, growth of VIP revenue has outstripped that of the mass market by a steadily widening margin, with VIP baccarat’s share of total casino revenue rising from 62.7% in 2005 to 67.2% in 2007. It further spiked to 69.7% in the first quarter of 2008. Operators seeking to raise their commission rates claim the strong growth of VIP gaming revenue in the first quarter of 2008 was driven primarily by Crown’s higher commission rate, but another possibility is that it is merely a continuation of the steady rise of the VIP market since 2006. VIP baccarat revenue increased 27.4% year-on-year in 2006 and 51.6% in 2007, while the mass market grew 15.5% and 37.4% over the respective periods. Skinny bottoms ahead? As with any price war,rising commissions could easily lead to losses. It could behove the other operators to wait until Melco PBL releases its Q1 2008 results, due later this month, and ascertain how the AMA deal has affected Crown’s bottom line, before they commit to aggressive commission rate hikes and expansion of VIP gaming capacity. The likely impact on Crown’s margin can be roughly estimated. The theoretical house edge on VIP baccarat is 2.52%, but most operators work on higher win rate assumptions, as most players do not bet optimally (the optimal strategy is to simply bet banker on every hand). Operators state their expected VIP baccarat win percentage in their earnings announcements, and although the laws of probability do not vary across properties, there is significant variation among those assumptions.In case you are tempted to use the variations to gauge how realistic each operator’s overall expectations are, bear in mind that there appears to be a correlation between the actual win percentage achieved by an operator in a given quarter and the expected win percentage claimed in that quarter. Forexample,whenWynnMacaureported a disappointing 2.4% win percentage over the four months it was open in 2006,it stated its expected win percentage ranged from 2.5% to 2.8%.A relatively luckyQ4 2007 led to a win percentage of 3.1%, and the company coolly raised its expected win percentage for the quarter to 2.7% to 3.0%. Owing to the intensity of the players and sums involved, VIP baccarat in Macau probably ranks among the world’s most volatile casino games for both house and player. Expectations can be influenced by new observations and experience, but unlesstheexpectedwinpercentageremains static, using it as a benchmark to comment on the actual win percentage—which varies with luck—is irrelevant. By arbitrarily raising the expected win percentage, an operator suggests a high win percentage can be sustained, and was not merely the Crown Macau VIP level 9 Crown Macau level 5