Inside Asian Gaming

INSIDE ASIAN GAMING | May 2009 40 A cut in the upper level of Macau VIP chip commission rates of just 10 basis points (i.e., 0.10%) could lead to a dramatic improvement in pre-tax margins and pre-tax earnings for the territory’s casino operators, says a report from Morgan Stanley Research Asia/Pacific. The report Macau Gaming & Property—Turning the Corner, by Praveen Choudhary and Corey Chan, says a cap on the upper level of commissions at 1.25% could boost margins on earnings before interest, taxation, depreciation and amortisation (EBITDA) by asmuch as 300 basis points, fuelled by a rise of up to 34% in EBITDA itself. “We believe Galaxy to be the biggest beneficiary of such a move, followed by Melco and Sociedade de Jogos de Macau SA (SJM) based on higher contributions from the VIP segment,” say the authors. Upward trend Galaxy, in its first quarter 2009 results issued in late April, reported a 17% quarter on quarter increase in volume of VIP play to HK$55 billion, against what it said was a general market decline for the period of 22%. The company added that its total market share of Macau gaming revenue rose from 10% to 13% in 2008. In early April, Amax Entertainment Holdings Ltd announced that rolling chip volume generated at Crown Macau by AMA International Limited (in which Amax has an indirect 80% effective interest on profit sharing) totalled HKD58.9 billion for the three months to 31st March. The twofinancialmodels belowoutlinewhat the authors say is the potential ‘before’ and ‘after’ effect of a 1.25% cap on commissions. For the record, as of 31st March, Morgan Stanley held at least US$1 million in debt securities issued by Galaxy Entertainment Group. Morgan Stanley & Co. also makes a market in the securities of Melco Crown Entertainment Ltd. Current rates The report analysts say that based on discussion with the industry, they believe the current VIP rolling chip commission rate in Macau is around 1.33%. This amounts to an increase in average commissions of around one third in the space of less than two years, probably stimulated by the 1.35% offer made by Crown Macau’s management to Amax, the Hong Kong-listed junket aggregator in the fourth quarter of 2007. “Talks on commission caps first surfaced in October 2008. However, several months have passed and some of the investors have given up hope,” say the report authors. “We, however, believe that caps will be implemented in 2009 Morgan Stanley says a cap in VIP commissions could be just the boost a recovering Macau market needs Impact of Commission Cap on Operators Source: Company data, Morgan Stanley Research Note: based on 2010 top down estimates