Inside Asian Gaming

23 22 enerally, in Las Vegas the casino is the holder of the gaming licence, raises its own capital, operates the casino and is responsible for marketing or attracting clients. The Macau gaming market differs to the extent that these activities are sometimes outsourced to third parties.The following explains the responsibilities of each participant in the Macau gaming market: • Gaming concession and subconcession holders have the right to generate gaming revenue and are responsible to the authorities for the overall management of the casino or VIP room. Officially, the concession holder is responsible for activity in the casino and the payment of taxes, but partners with a vested interest in the casino operation, such as Greek Mythology, will have influence over deci- sions made in the casino. • VIP room operators are responsible for the overall marketing of the room and providing hosts, rolling staff and cage personnel to conduct the rolling, buying, cashouts, etc, at the VIP room cage.These cage outlets, one in each VIP room, are manned by the room opera- tors’ staff. All the chips in this cage have been purchased from the casino concession holder and the cash belongs to the room operator, so the concession holder has no responsibility for the assets. Where VIP room operators are not also the concession holders, they will typi- cally receive a share of gaming revenue from the concession holder. VIP operators recruit junket agents. • Junket agents are responsible for marketing and attracting cli- ents to the casino or VIP rooms.They are typically individuals or small firms with extensive personal networks on the mainland. However, it is important to note that concession holders,VIP operators and other parties can, and often do, act as junkets as well, should they have the Macau’s VIP Market Structure Unlike VIP facilities in Las Vegas, the key feature of Macau’s VIP rooms is credit, not luxury, explains CLSA’s Aaron Fischer as he outlines the workings of Macau’s VIP market necessary network of clients. Participants in the Macau market often wear more than one hat. How the traditional SJM VIP model works Under the more established business model, SJM as the licence hold- er would own the casino property and operate the main gaming halls but subcontract the running of the VIP rooms to third parties known as VIP room operators. A revenue-sharing agreement typically gives the licence holder c. 20% and the room operator c. 40% of the gross gaming revenue.This revenue share can vary depending on the abil- ity of the VIP operator to generate business and whether the licence holder is required to contribute working capital. There is limited clarity surrounding the arrangements between casino/room operators and junkets. For example, Hong Kong news- paper The Standard reported last year that the auditors of Century Legend Holdings issued a “qualified opinion” on its annual accounts for the second consecutive year due to insufficient information on its intermediary business. This is largely related to the oral nature of agreements on junket arrangements. The need for credit and facilitation The VIP market is typically defined by the level of facilitation and credit that is extended to the player rather than the luxurious nature of gaming rooms or provision of upmarket hotels, which would nor- mally characterise the VIP market in Las Vegas. The industry practice of facilitation and credit is necessary due the difficulty of transferring cash outside China - the current cash im- port level is Rmb20,000, which is considered a typical minimum bet in VIP rooms. Credit and facilitation is also important for convenience and for “face.” However, in order to extend credit, the casino operator requires detailed market intelligence on the player, including the ability to re- pay. However, it is not easy to be able to distinguish the suitable play- ers from the greater China region as there are very limited publicly available credit reports.This is unlike the US, where credit history can be easily obtained by using a social security number. Therefore, the casino operator will rely on junkets which are in a better position to issue credit because they possess the information on the player. This is one of the important roles of the junket. There is a credit chain going from the concession holder down to the junket, in which various players issue credit. In return for bringing in clients, junket agents earn 0.75-1.1% commission on the value of the non-negotiable chips purchased on behalf of customers. Junkets typically have access to tables at each of the hotels so their business is very mobile. Junket operators do not always have sufficient capital, so they are attracted to casinos that can offer credit and the best commission. As the market is becoming more competi- tive, there is increasing demand for junket agents due to their role in arranging facilitation and tapping the right customers. However, potential changes in legislation dealing with facilitation and credit could see a shift in power away from the junket agents. Practices implemented by some junkets to enforce gaming debts could be considered questionable, at best.We understand that some- one was accidentally killed recently in relation to the enforcement of gaming debts. Any potential reaction from the Chinese government could create a short term risk for Macau’s gaming market. Challenging for western casinos to tap VIP market The dependence on junkets to provide player credit and facilitation poses challenges for western operators in the medium and short run: • The Macau government authorised casinos, operators and junket agents to grant credit in 2004. However, companies are not yet permit- ted to write off bad debts for tax purposes. At a 39% tax rate, this cre- ates a disincentive to grant credit and be liable for tax on revenue that is not collected.We expect the authorities to pass legislation permitting bad-debt write-offs for tax purposes,in 2005.This could be a catalyst for western-operated casino to more aggressively market to high rollers. • A challenge for the US casinos is to ensure that they recruit jun- ket agents that operate within the bounds of US legislation. Failure to do so could create issues with the Nevada State Gaming Board.We believe western operators will utilise junket agents over time but only the ones that are permitted to do business in Las Vegas. • Due to Nevada Gaming rules, US casinos also require players to complete paperwork, including the presentation of identification, on the exchange of cumulative cash amounts above US$10,000.This de- ters some visitors. Revenue sharing for VIP play In the figure below, we highlight the standard breakdown of VIP rev- enue,which is known as the 40/40/20 model.Typically,the concession holder receives around 20%of gross gaming revenue and the govern- ment receives 39% in for gaming tax.The VIP operator derives around 40% of gross gaming revenue from which a distribution needs to be made for commissions. However, each participant’s share of revenue can also vary significantly depending on which party is responsible for paying commissions; providing infrastructure and other capital; and generally the risk appetite of the VIP room operators. In order to provide an example of how the revenue model can vary, we have highlighted Galaxy’s revenue sharing for its Waldo op- eration from its latest accounts.One important variation is that 12% is paid to theWaldo Hotel for rent of the hotel/casino operation and for being responsible for the overall marketing of the operation. Junket commission rates There is very limited visibility in terms of the actual amounts that VIP operators pay out to junket agents.The amount varies from operator to operator based on a number of factors including commission rates, which range from 0.75% to 1.1% and the specific arrangements with particular junkets. It is important to note that other parties act as jun- kets including VIP room operators and players who wager very large amounts. These parties will therefore retain commissions. The com- mission program is typically open to those parties that can turnover over US$100mn in a one month period. Based on a commission rate of 0.75% and a net win percentage of 2.5%, the potential commission pool could be as high as 30% of gross gaming revenue (0.75%/2.5% = 30%). However, it is unlikely that 30% is fully paid out to junkets as VIP room operators and players retain some commission. Gross gaming revenue VIP operator 40.5% Commission Concession holder 20.5% Tax 39% Gross gaming revenue Other charges 5.3% Commission Concession holder 4.1% Waldo (Service provider) 12.3% Tax 39.1% VIP operators 39.2% Other costs 1.7% Galxy Waldo’s revenue-sharing arrangement Source: Galaxy Casino SA accounts Standard VIP revenue-sharing arrangement Source: CLSA Asia-Pacific Markets Profit 2.4% G VIP room in Emperor Palace Casino