Inside Asian Gaming

INSIDE ASIAN GAMING | August 2010 42 have increased over time,” points out CLSA. “Casinos book these as casino receivables (a component of account receivables) in their balance sheets. They typically extend credit against last month’s commission to the junkets to safeguard any potential irreclaimable debt. Some agreement can be made to advance up to two to three months worth of credit if the junkets have longstanding relationships with solid performance as well as financial backing,” adds the CLSA team. If an investor chose to deposit HK$5 million with the Hang Seng Bank at monthly interest of 0.0100% as quoted by the market at the beginning of August, then on a non compound basis the investor would earn HK$500 (before any tax liability owed to the investor’s tax domicile) in one month. Were an investor to lend HK$5 million to a Macau junket at 1.5% monthly interest, he or she would earn HK$75,000 pre-tax during the term of the loan. According to CLSA’s junket sources, junket players generally pay back their borrowings to the junkets in about 10 days, allowing junket liquidity to be sustained. Lending to junkets is potentially very profitable for capital providers. That in turn is linked to the fact the junkets must chomp through a lot of capital to generate sufficient rolling to make a profit on the gambling action. CLSA says the amount of capital needed to operate Macau junkets is around six times the revenue generated by VIP players. “Understanding the math behind junket liquidity is important,” state the report authors. Casino receivables as a portion of VIP gross revenue 25 (%) Sands China Wynn SJM Melco Crown 20 15 10 5 0 2006 2007 2008 2009 Source: Companies be willing to lend capital to that junket because he personally knows some of its customers and knows their track record for repayment. And although mainstream financial markets are used to dealing with intangible assets, the fact the ‘asset’ on which a junket’s capital debt is secured is the chip rolling of the particular junket’s VIP players may be a step too far in terms of a lending institution’s risk appetite. CLSA comments: “The clear risks lie in the repayment days, which will have a large impact on subsequent month’s working capital.” Butthereportauthorssaythatrepayment cycles are likely to remain stable. “To achieve gaming revenue of US$7 billion in the VIP segment, assuming junkets extend credit based on the ratio of 1:1 (US$1 of credit received in Macau for every US$1 pledged by a player), US$35 billion of working capital is needed from the junkets (about 6x revenue from junket VIP).” Despite the theoretical profit potential of lending capital to junkets, it seems unlikely from IAG ’s perspective that financial institutions will become involved in the process to any great extent. That’s because the risk involved is not easily understood by people outside the junket system. For example, a friend of a junket operator may Were an investor to lend HK$5 million to a Macau junket, he or she would earn HK$75,000 pre-tax Liquidity requirement to fund VIP revenue Net win Gaming revenue (US$bn) 10 VIP portion 7 Direct VIP (15% of VIP) 1,05 Junket VIP (85% of VIP) 5.95 Mass portion 3 Rolling chip/wagered amount Junket VIP @2.85% holding rate 209 Sensitivity Ratio of player pledged amount: junket borrow (x) Player 1 1 1 1 Junket 1 2 4 10 Contribution from player junket Player pledged portion 0.5 0.3 0.2 0.1 Junket portion 0.5 0.7 0.8 0.9 Player pledged portion (US$bn) 104 70 42 19 Junket portion (US$bn) 104 139 167 190 Total (US$bn) 209 209 209 209 Junket repayment days (No.) 10 10 10 10 Junket equity needed (US$bn) 34.8 46.4 55.7 63.3 Source: CLSA Asia-Pacific Markets Feature