Inside Asian Gaming

July 2008 | INSIDE ASIAN GAMING 45 Market Share Myths and reality Before writing off the IPO in particular or SJM in general, it’s worth considering some underlying facts. At the end of Q2 this year, more than six years after the formal ending of Dr Ho’s monopoly, SJM retains a Macau market share provisionally estimated at 27%. Although this represents a dramatic fall from SJM’s 70% share in Q3 2006, and a retreat even from the 31% share of Q1 2008, it means SJM still has the largest individual market share of any operator. Its slice is 5% higher than that provisionally estimated for LVS and 10% higher than that for Wynn. An even more interesting statistic, not revealed in the market share story filed by Agência Lusa, the Portuguese news agency, is what proportion of SJM’s 1.034 billion patacas (US$129.3 million) gaming revenue for Q2 2008 was VIP revenue and what proportion was mass market. Although margins on the mass are typically higher than the VIP sector, the sheer volume of junket play in Macau (accounting for 69.7% of all games of fortune in Macau in Q1 2008) makes VIPs vital to the bottom line. Keeping up Sources familiar with SJM indicated that asaproportionofgrossrevenuesattributable to SJM-licensed casinos, VIP play in Q1 held up quite well against the competition from junket aggregators, thus hitting or coming near to the Macau industry average of 70%. This is perhaps not surprising, given the coverage of SJM-licensed casinos. Taken on its own,however,it is not a reliable indication of the underlying health of SJM’s own business, as investors would need to know what price SJM and its VIP room partners were paying in commissions to hang on to agents and their VIP customers. Revenue split As Dr Wuyi Wang points out in a recent research paper for Macao Polytechnic University: “In Macau’s traditional VIP room model, VIP baccarat revenue is calculated by deducting dead-chip commission, reward on over productivity and tax. Only then is the residual shared between the casino and the contractor by the ratio of 7:3.”This 70:30 SJM IPO Macau Casino Revenue by Concessionaire (US$ millions) 4Q’07 1Q’08 April May June Las Vegas Sands Corp 843.6 759.3 215.8 310.9 273.9 % Share 27.3% 20.5% 19.0% 25.5% 22% SJM 1,079.9 1,034.7 318.0 341.4 336.2 % Share 35.0% 27.9% 28.0% 28.0% 27% Wynn Resorts 447.1 598.6 204.4 213.4 211.7 % Share 14.5% 16.1% 18.0% 17.5% 17% Galaxy Entertainment Group 464.4 394.7 113.6 97.5 124.5 % Share 15.1% 10.6% 10.0% 8.0% 10% Melco Crown Entertainment 228.9 641.0 204.4 170.7 199.2 % Share 7.4% 17.3% 18.0% 14.0% 16% MGM Grand Paradise Ltd 20.2 284.3 79.5 85.3 99.6 % Share 0.7% 7.7% 7.0% 7.0% 8% Total Market(USD mn) 3,085.0 3,712.5 1,135.7 1,219.1 1,245.2 Total Market (MOP mn) 24,707.0 29,822.6 9,120.0 9,790.0 9,961.6 Source: Lusa News Agency model on the net has been further modified in many VIP rooms because of recent competitive pressures. With a voluntary industry-led cap on Macau VIP commissions imminent, possibly backed up by government legislation, any agents who recently left SJM VIP rooms to chase better commissions for themselves and better liquidity for their VIP players elsewhere, may soon be back in the SJM fold if the competitive edge is smoothed down through regulation. SJM has seen its overall Macau market share shrink since 2002 due to competition, but the market is growing and SJM has ‘coverage,’ as they say in the advertising industry. It either operates or provides licences for 19 of Macau’s 29 currently operating casinos. As the market matures and the pace of newopenings slows,SJMwill have to develop “stickiness”—the knack for being able to draw visitors into a venue and then keep them there¬ with promotional offers, only letting go to ‘feed’ them out to venues and attractions within the same stable of companies—in order to maintain or even build market share in a relatively fragmented universe of consumers. The lotus flower-shaped Grand Lisboa towers in the distance