Inside Asian Gaming

9 8 outgross Sands Macau in the year of Macau’s big bang. Waldo now has 63 tables (43 of which are in 16 semi-private VIP rooms), and with a slew of better-appointed Galaxy prop- erties set to open, will presumably not add many more. With the mass-market clearly not having made much of a contribution to Waldo’s revenues, the slot count was cut to 100 to make room for the extra tables. The opening of Sands Macau and Waldo, combined with the central government’s eas- ing of travel restrictions on mainland Chinese wishing to travel to Macau, led to the city’s gross casino gaming revenue surging 44.3% year-on-year in 2004 (to surpass the US$5 bil- lion mark), as visitor arrivals surged 40.2% to 16.7 million. Growth has understandably slowed con- siderably since that big bang,especially given the lack of any major new casino attractions coming online.In 2005,the growth of Macau’s gross casino gaming revenue had slowed to 11.3%, and visitor arrivals rose a more sub- dued 12.2%. Waldo was particularly hard hit, seeing profit plunge, while Sands Macau’s profit kept rising.Waldo’s profit fell over 80% to HK$13.5 million in the six months ended June 2005, from HK$72.7 million in the prop- erty’s first six months of operation.Galaxy En- tertainment Group announced a profit jump for full-year 2005, though this was 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, page 44). The crowd-pulling Vegas-style Sands Macau proved the obvious – you can create more demand for mass-market gambling by giving people a more spacious, comfortable and attractive casino to gamble in. Sands Ma- cau has not proven much 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 less appealing gambling environment, estab- lished connections with high-rollers through junket operators could generate more rev- enue. It appears, however, that those connec- tions can be fickle, with Sands Macau having made considerable inroads into the VIP mar- ket, as Waldo’s share of the market declined. Decline Only by Definition Part of Galaxy’s poor performance was attrib- uted to an overall drop in Macau’s high-roller revenue, which in turn was attributed to the gambling crackdown in mainland China, re- stricting the ability of mainland officials to gamble, as well as Macau’s increased efforts to combat money laundering.While revenue from undesirable sources seems definitely to have dried off, however, the high-roller mar- ket has – contrary to recent reports – actu- ally expanded. 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’s Gaming Inspection and Co- ordination Bureau (DICJ for the Portuguese Direcção de Inspecção e Coordenação de Jogos) provides statistics broken down by the type of game rather than by level of play, and until now, the VIP baccarat category of- fered an accurate measure of high-roller ac- tivity. That has changed with the arrival of Sands Macau, which does not use VIP room operators to conduct its high-roller business, meaning none of its high-roller revenue is captured by the VIP baccarat figues.With the rapid growth in Sands Macau’s share of the high-roller market, the gap between high- roller and VIP baccarat revenue is widening. Macau’s VIP baccarat revenue fell 3.1% year-on-year in 2005 to US$3.5 billion, and its share of total gaming revenue declined to 62.7% from 72.0% in 2004. Sands Macau reg- istered US$244 million of high-roller revenue in 2005 – equivalent to 25.1% 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$3.7 billion. High-rollers accounted for 67.0% of total revenue in 2005, down 5 percentage points from 2004. The mass-market grew a faster 27.2% to US$ 1.7 billion, commanding a 30.3% share of the total market – up 3.8 percentage points from 2004. Slot machine revenue almost doubled to US$152 million in 2005,taking up 2.7% of the total market,from just 1.5% in 2004. Credit Suisse points out that last year,Ma- cau’s high-roller market suffered a one-off hit, when, according to industry sources, one of the major junket organisations had trouble issuing credit to its customers in July, lead- ing to that month’s total gaming revenue de- clining year-on-year for the first time in two years. Credit Suisse says that if the decline caused by that one-off event was discounted, 2005 high-roller gaming revenue would have increased 8% 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- roller market grow. Analysts had predicted it would take many 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 a mere 2.0%. Sands Macau has thwarted analysts’ expectations by increas- ing its share of the high-roller market to 9.8% by the end of that year. Galaxy Waldo has been hit especially hard by Sands Macau’s move into the high- roller market.TheWaldo’s net gaming win fell by a third from HK$3.0 billion in its first six months of operation to HK$2.0 billion in the first half of 2005. It appears Galaxy Waldo has also been forced to increase its commissions to junket operators because of competition from Sands Macau. 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 in high rollers, compared to the 12- 15% offered by “local” operators and VIP pro- moters. Sands Macau needs to offer higher commissions because it does not offer credit, so forces its junket operators to bear the risk of granting credit themselves. Sands has clearly also set the commission high enough to entice junkets to drop their established connections and bring their customers to its casinos. It appears Galaxy Waldo has felt com- pelled to raise its own commission rates, which has widened the decline in profit from the drop in overall revenue. Even though Galaxy Waldo’s total win declined by a third between the second half of 2004 and the first half of 2005 to HK$2.0 billion, the commis- sion and allowances paid to promoters fell just 26.9% to HK$858 million.This means 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 paid per unit of gaming 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 from 11.6% in the third quarter of 2004 to 21.6% in the fourth quarter of 2005. Galaxy Waldo saw its market share decline from 14% to an estimated 8-9% over the same period. Stanley Ho’s SJM now has a 70% share of Macau’s gaming revenues and the company’s profits have continued rising, albeit slower than that of LVS. The opening of Wynn Macau could place 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 and welfare contributions. Credit Suisse is more optimistic about the potential of the mass-market segment, which Galaxy is set to court over the coming months. With a mere 63 gaming tables in Macau as of January, Galaxy was not much of a force to be reckoned with, but the operator is set to raise its table count to 530 by the end of the year. Resuming the Boom It took several billion years for the expansion 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 the middle of this year, as several new stars join the city’s casino constellation. Analysts focus on the September opening of Wynn Macau, which will contain 200 tables and 380 slot machines in its first phase, with an additional 300 tables and 600 slots slated to open in the first half of 2007. Galaxy will add two big new properties before Wynn Macau opens, however, in addition to having just opened the Rio Casino in February,inside the independently operated Rio Hotel. The Rio becameMacau’s 19th casino,with 90 tables (including 15 in four VIP rooms) and 150 slots. The theme isn’t Samba, but rather Galaxy StarWorld will have “affordable rates” and a bevy of dining and entertainment offerings