Inside Asian Gaming

10 to follow through on their investment com- mitments or experienced paltry returns were Hong Kong-listed China National Resources Development Holdings and Creator Capital,a Vancouver- based firm part-owned by casino giant Harrah’s Entertainment. One unlikely entrant to the China 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 for VLTs. 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 the possible venture. CPG management says the gas business will remain the company’s core operation, and while the company’s stock price had rallied following the announcement of its lottery aspirations, it has been sliding steadily since mid-February. Hong Kong-listed Megainfo is in the midst of a turbulent stock market ride due to the China lottery hype, even though it has no lottery interests. The company describes its principal activity as “the provision of digital image processing management solu- tions,”but unfounded rumours that its major shareholder would inject his Chinese lottery interests into the listed entity sent the stock price rocketing to HK$2.05 on resumption of trading on August 1, from just HK$0.04 when trading was suspended on July 18. It did not take long for gravity to take hold, however, and the stock plunged the following day,and continued falling after Megainfo announced 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 play here.” The stock prices of Kantone Holdings and Win Win Gaming have been much less vola- tile, even though both recently did actually acquire China lottery interests. Hong Kong- listed Kantone invested HK$70 million (US$9 million) to buy a Shenzhen company that de- velops paperless lottery systems for its native city as well as Shanghai,andWinWin Gaming launched a second scratch-card game 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 the China lottery market as operating system suppliers, Australia-listed Sino Stra- tegic International (SSI) functions as a sales agent, and has been awarded 750 of 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 the number of sales agency permits to 1,000 by 2007 (from around 1,600 at present), and the objective is to replace street vendors with indoor sales operations within two years. Operating system suppliers like CLS re- ceive 0.92-1.6% of lottery sales,whereas sales agents are entitled to 6-7% in order to cover higher operating costs, such as rental and selling expenses. Deutsche Bank points out that sales agents face greater regulatory and operational risks. Like CLS, SSI has ambitious plans to expand across China.The company’s stock price began 2005 at a mere A$0.16, and rose as high as A$4.2 last year, but retreated to A$2.75 by August 11. Even though CLO is the only nationwide high-frequency lottery operator,both Shang- hai and Beijing have their own officially sanc- tioned local operators. However, the Guangxi andGuizhou provincial sports lotteries are of- fering Keno, and there is a risk that other city and provincial governments may attempt to run their own high-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 since mid-2004 and Shanghai since mid-2005). The two biggest US lottery sup- pliers have interests in Shanghai and Beijing. Shanghai’s lottery network was set up by Gtech, while a company now part of Scien- tific Games handled Beijing’s.Both Gtech and Scientific Games trade on Nasdaq. 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 also ever-present in China, with the introduction of online lottery games driven by the scope for abuse of scratch-card games, as in the BMW scandal. Meanwhile, if high-frequency lotteries gain in popularity and lead to problem gam- bling, “the government may slow down the roll-out or even ban these new games,”warns Deutsche Bank. VLTs in particular have po- tential to lead to addictive behaviour, which is why the government has limited them to CLO parlours, while Keno can be offered in a wider range of venues. The government has also sought to prevent problem gambling by limiting the size of 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 even ban these new games,” warns Deutsche Bank acau had 17 casinos in 2005, and LVS’ Sands Macau captured about 35% of the city’s mass market 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 share of that market from a mere 2% at the start of the year to 9.8% by the end. 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 the 12-15% offered by “local” operators and VIP 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-Roller Push Not content with its domination of Macau’s mass market, Las Vegas Sands Corp (LVS) began an aggressive push into the VIP market in August, spurring local casino tycoon Stanley Ho to accuse the company of engaging in “vicious competition,” as Jose Ho reports tions would be difficult to break. In August, Sands Macau apparently fur- ther turned up the heat on its competitors in courting high-rollers.On August 11,erstwhile monopoly casino operator Stanley Ho went before the Macau media to announce Sands Macau had significantly raised rolling com- missions that month,which hewarnedwould trigger“vicious competition.”According to lo- cal VIP room operators, Sands Macau has be- gun offering direct rolling commissions of as high as 1.2% to walk-in high-rollers who are not accompanied by junket agents. Before the liberalization of Macau’s casino industry, direct commissions were rarely offered in the city, with commissions as low as 0.7% offered to junket agents by SJM.SJM and Galaxy now offer commissions of around 1%. Stanley Ho claimed that Sands Macau’s aggressive move could result in the closure of a third of his 150 VIP rooms and the loss of “thousands of jobs.” He also said that SJM’s VIP revenue could drop by 20%, though he offered no time frame. Stanley Ho called on the government to intervene, and suggested the formation of an association of casino operators. Accord- ing to Mr. Ho, with the exception of LVS, all of Macau’s casino licensees – including SJM, Galaxy,Wynn Macau, and the Melco-PBL and MGM-Pansy Ho joint ventures – have agreed to join such an association.Mr.Ho said he had approached LVS executives to join the asso- ciation, but they failed to respond. The opening of Wynn Macau could place further upward pressure on junket commis- sion rates,particularly sinceWynnMacau’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. Meanwhile, despite poor results at its Las Vegas property, LVS’ second-quarter earnings were buoyed by strong growth at Sands Ma- cau. Casino revenue at The Venetian in Las Ve- gas fell 3% year-on-year in the second quarter to US$$71.3 million – although customers wa- gered more money on slots and table games, 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 quarter was US$517 million, up 29.6%. M 11