Inside Asian Gaming

July 2010 | INSIDE ASIAN GAMING 21 business to Crown. AMA is a subsidiary of Amax Holdings (formerly Amax Entertainment Holdings), a company that initially raised junket working capital via equity issuance on the Hong Kong stock market. The junket insider explained: “When Amax came into the market, the junkets did start chasing after players in order to compete. That did lead to some bad debt. It doesn’t happen now.” The umpire strikes back One likely reason for the shift from a buyers’ to a sellers’ market in VIP junket services in Macau is the implementation by the Macau government in September 2009 of a long anticipated 1.25% cap on rolling chip commission. But as our article last month ‘Caps, What Caps?’by gaming consultant Ben Lee explained, there are other ways for casino operators to compete for junket business and for those junkets in turn to differentiate themselves in a busy market. This is via the medium of profit sharing. Profit sharing is an alternative junket arrangement where instead of the casino paying the junket operator commission based on rolling, the former agrees to split the win/loss result from designated VIP rooms with the latter. “I think there’s still a good deal of confusion in the public’s mind regarding the business models operated by the junkets in Macau,” says Ricardo Siu, Associate Professor of Business and Economics at Macau University and a long-time observer of and commentator on the VIP gaming segment. “The system of incentives varies from one operator to another and one junket operator to another,” he adds. One common factor, however, between the different junket business models under current market conditions seems to be a preference for setting up what are in effect commercial and financial firewalls between the working capital of the junket and the credit exposure of the player. This conservatism stems principally from the fact junket operators are operating on very small margins (generally a spread of between 1.1% and 1.41% of the gross wagered). As a result junkets typically depend on a high volume of roll to carry them over the profitability goal line. If a player debt goes bad, the loss may need to be covered out of the junket’s working capital. Courtship The insider spoken to by IAG says that after the initial introduction of a potential high roller to the junket, a ‘warming up’ period follows. During this phase, the junket’s representatives may visit the person at his business place or even his home to understand the nature of his business and to understand his social situation. “This process helps us avoid bad debt,” explains the insider. “You only need to have one player go bad on you and that’s your profit gone for the month,” the insider adds. “Please remember that when a casino issues chips directly to a premium player, if that player doesn’t honour the line of credit, it is a receivable that can be written off. When we as a junket issue chips, that’s real money. We have to pay the casino operator for those chips. If the debt is not honoured, that can affect the junket’s working capital.” In the past, it was possible for a high roller declined credit by one junket operator to keep shopping around in Macau until he found someone in the market either willing to take on the commercial risk or who didn’t have up to date intelligence on the level of commercial risk involved in dealing with that particular customer. “There was a time when a person could be refused credit at say the Wynn then walk across the road to say the Grand Lisboa and get credit there,” states the source. “That doesn’t happen today,” explains the insider. “Most junkets don’t share information directly between each other except perhaps informally in what we sometimes refer to as ‘Rumour Control’. But where a junket has operations across several properties, those operations do talk to each other. That means it’s a lot harder for a player declined junket credit in one property to go across the road and get it in another.” Conditional love Even when a junket takes on a new VIP, the junket’s exposure to that player is managed on an incremental basis, suggests the source. “If it’s a new customer and they want to play with say HK$500,000-worth of chips, they might get only 25% of that on a credit basis from us.” In other words, the player needs in effect to provide 75% ‘equity’ on the deal. Depending on the financial profile and personal circumstances of the player, such an equity arrangement may last indefinitely or until such time as the player’s track record for repayment is clearly proven. Such conservative lending policies by the junkets could be good news for investors and the Macau casino market as a whole. Moody’s, a ratings agency, warned at the end of June that the quality of some mainland lending associated with China’s financial stimulus package was questionable. It mentioned loans for property and investment vehicles set up by local governments as carrying some of the highest risk. In that kind of macroeconomic climate, it could be that the junkets are not only protecting themselves from commercial risk, but also protecting Macau as a whole from a potential hard landing should there be any sudden and disorderly unwinding of credit deals in China. Market View Getting to know you—junkets vet new customers Happy ever after? Junkets’ love for players is strictly conditional