Inside Asian Gaming

Oct 2007 | INSIDE ASIAN GAMING 29 Despite rising competition, we do not foresee Malaysian commission rates moving much higher as 1.5% is already the theoretical limit (or 55% of gross margin) for a low-teen gross margin. In Macau, there are limitations on how operators can undercut on commission rates given the jurisdiction’s already high gaming tax.We believe Macau operators would not want to offer anything beyond 1.2% from the current average of 1.0% if they want to keep gross margins in excess of 10%. Singapore, on the other hand, is likely to offer higher commissions or rebates given the low tax structure. Even after imputing higher operating and other soft costs in Singapore, we believe Singapore still enjoys a higher VIP margin than Macau and Malaysia.This goes to show that there is room to raise the commission rate higher than in Malaysia.We believe the com- petitiveness of Singapore’s VIP market may also depend on the government’s regulation in relation to issues like availability of credit for players, onerous registration, auditing on junket operators, players’ privacy and the minimum amount of transactions to be recorded under anti-money-laundering legislation. Junket commission There are two VIP strategies that are commonly practiced in this part of the world. Differ- ent approaches have varied implications on junket commissions and therefore profitability: ◊ Junket operators: In Macau, we estimate that there are roughly 100 junket operators licensed by the Macau government. Casinos may offer the junket operators a choice in pay- ment structure between (i) revenues-share and (ii) Rolling Chip %. A revenue-share structure will provide the casino operator withmore cushioning on quarterly earnings volatility against unlucky VIP hold swings. But junket operators would need higher working capital to fund the short-term volatility. We estimate the current junket commission is roughly 1.1% of Rolling Chip for the largest junket operators. In Malaysia, we understand that Resorts World works with roughly 40 junket operators in Asia.These junket operators are not regulated by Malaysian laws but are instead self regu- lated by Resorts World, whereas in Singapore a much more stringent regulatory system will be put in place where all junkets will need to be licensed by the Singapore gaming authority and meet all specified regulatory criteria. ◊ Direct VIPs: This is a new customer segment in Macau, as until a few years ago, casino operators were prohibited by Macau laws from granting credit directly to customers. All the new casinos are looking to expand this segment, as margins are the highest here.This is also the segment to which Las Vegas and Australian casinos are most accustomed. Unlike Macau, a Malaysian casino operator is not allowed to grant credit directly to cus- tomers. Gaming tax The gaming tax structure varies widely across different markets. Singapore has the lowest and the most transparent structure.Gaming tax rates of 5% for VIP (S$100,000 and above) and 15% for mass are fixed for at least the first 15 years.During this period, the only variable is GST, which will be applicable to gross gaming revenue (after gaming tax). In Malaysia and Macau, the gaming tax is fixed at 25% and 35% respectively. The last time the Malaysian government reviewed the gaming tax was in 1999, when the tax rate was changed from a tiered structure to a flat rate of 25%. For Macau, the current rate has been fixed since 2002. Labor cost Other than junket commissions and gaming tax, labor is the third-largest cost item for casino operators.We estimate that this accounts for roughly 8-12% of gross gaming revenue. In view of the rising staff requirement for all new casinos and integrated resorts opening over the next three years in Macau and Singapore, we estimate that the industry will require a new workforce of close to 120,000 people.Most of this workforce is likely to come from the associ- Salary scale Malaysia RM 2,000 US$570 RM 3,000 US$857 Macau HK 14,000 US$1,818 HK 20,000 US$2597 Starting salary for a dealer Staring salary for a dealer Salary for gaming floor supervisor Salary for gaming floor supervisor Source: Deutsche Bank Gaming tax (% of gross gaming revenue) Singapore VIP 5% Mass 15% GST/Others 7% Comment Gaming taxed is fixed for at least 15 years Source: Deutsche Bank; company data Macau 35% 35% 5% Up to the government; the last review was in 2002 Malaysia 25% 25% 0% Up to the government; the last review was in 1999 In view of the rising staff requirement for all new casinos and integrated resorts opening over the next three years in Macau and Singapore, we estimate that the industry will require a new workforce of close to 120,000 people.