Inside Asian Gaming

INSIDE ASIAN GAMING | May 2008 14 other operators have got it wrong, such an aggressive expected win percentage could come across as a transparent attempt to boost the company’s stock price. Melco PBL stated a flat 2.7% expected VIP baccarat win percentage in its Q4 2007 results announcement. Although this makes Melco PBL the listed operator with the lowest expected win, that does not mean the company has proven itself to be prudent or modest, especially since its actual win for the quarter came in well below expectations at 2.4%. This is reminiscent of Wynn Macau’s weak start, and it is likely that future lucky quarters will lead Melco PBL to also revise its expected win percentage upwards. It is also noteworthy that as the operator claiming the lowest expected win percentage, and after having just experienced such an unlucky quarter, Melco PBL was still so aggressive in raising its junket commission rate. To assess the impact of the new commission rate, let’s assume Crown Macau achieves the expected 2.7% VIP baccarat win percentage. Macau’s steep tax on gross gaming revenue claims 40% of all casino revenue (35% as direct tax, and the remainder as mandatory social and welfare contributions). At a 2.7% win percentage, a 1% commission on rolling chip sales would claim a further 37% of revenue (leaving the casino up to 23% of revenue after taxes and commission are paid), while a 1.35% commission rate would take 50% (leaving only up to 10%). Thus, a 35% increase in the commission rate could theoretically reduce the share of revenue going to the casino by more than 50%. Of course, unlike the constant 40% that goes to the government as tax, the share of VIP revenue that goes towards commissions varies according to the win percentage. When the commission rate is 1.35%, a lucky 3% VIP baccarat win percentage would leave the casino with up to 15% of revenue after taxes and commission are paid, while a low 2.4%win percentage would only leave a maximum of 3.75%, which would probably not cover operating costs, regardless of the volume expansion. With Crown Macau having more than doubled its share of casino revenue since December, and considering at least some of the strong volume growth in the first quarter can be attributed to the AMA deal, it is possible that the new arrangement has had a positive impact on Crown’s earnings after discounting the margin decline (and it is quite possible that Crown was previously paying above the 1% assumed market average, so the gains could be accompanied by a less pronounced margin decline). Once other operators introduce similar arrangements and take back market share, however, the impact could turn negative for all concerned. Sympathy for Macau Pretty much every new casino operator arriving inMacau,with the notable exception of Galaxy, announced plans to cut out the middle men and draw VIP gamblers directly, before quickly realising it was simply too difficult to do so. Crown’s latest move has proven that Macau’s VIP market is extremely price sensitive. Under such conditions, any escalation of the commission rate by one operator will soon be matched by the others, because they would otherwise simply continue losing market share. Melco PBL may have adopted such a radical approach because it saw no other way to improve Crown Macau’s previous mediocre performance. Granted, the enabling of junkets to extend more credit to players could prove an enduring volume booster, but any gains Crown achieved from the commission rate hike could soon be eroded. Shifts inmarket share can grab headlines and move stock prices ahead of earnings being announced.While Macau’s VIP market is set to continue its rip-roaring ride, the heady revenue figures could become a less accurate indicator of how much money the city’s casinos are actually making as rising commission rates cut further into margins. Next time you read that Macau’s gaming revenue is now some surprising multiple of revenue on the Las Vegas Strip, consider how little of that revenue casinos in Macau get to keep after paying commissions and taxes, while casinos in Vegas get to pocket a much bigger share of revenue that is mostly generated by undemanding slot machines and is taxed at less than 7%. Cover Story Macau Gross Casino Revenue 2004 2005 2006 2007 Total (MOP bn) 41.4 46 56.6 83.0 Year-on-Year Growth, % 44.3 11.3 23.0 46.6 VIP Baccarat (MOP bn) 29.8 28.9 36.8 55.8 Year-on-Year Growth, % 34.3 -3.1 27.4 51.6 Share of Total, % 72.0 62.7 65.0 67.2 Mass Market (MOP bn) 11.6 17.2 19.8 27.3 Year-on-Year Growth, % 78.5 48.2 15.5 37.4 Share of Total, % 28.0 37.3 35.0 32.8