Inside Asian Gaming

April 2011 | INSIDE ASIAN GAMING 35 M ost investors probably see Macau operator plays as infrastructure investment opportunities linked to Chinese GDP. It might be better at this stage in China’s economic development to see them as short-cycle plays led specifically by events in the VIP gaming market. Here’s why. Not only do the VIP junkets currently supply around 72% of Macau’s gross gaming revenue (the 2010 figure), but they also operate on business principals and on occasions with levels of risk appetite that are fundamentally at odds with the business principals and normal risk appetites of the publicly-listed casino operators regulated in Nevada, New York and Hong Kong. Heavily-regulated international casino operators necessarily use the mainstream financial system for their funding. Lightly- regulated Macau junkets with cross-border operations that are legal in Macau but at best occupy a grey area within China use an informal banking network. Informal or underground banking is nothing new in mainland China, but companies operating in that zone don’t normally team up with Western cross-border investors. They get screened out by theWestern investors during the due diligence process. The process whereby junkets lend money to VIPs for high stakes play and then recover gambling losses from those VIPs is also measured over weeks or even days. That might seem at first sight like a good thing, because it limits the exposure of the junkets and the operators to high roller bad debt. The problem comes when the intense competition for VIPs among the junkets bumps up against the intense competition for revenue market share among the operators. The larger and higher profile junkets or junket consolidators are generally the most conservative in their lending policies and the most choosy about their VIP customers—but then they can afford to be because they have bigger pools of players and a better agent network scouting for them. The problem is when you get an unholy alliance between a new junket eager for business and an operator playing catch up on market share. That operator may be willing to ‘buy’ business by offering The Macau Dilemma Junkets—the worst possible solution, apart from all the others Treading a fine line—casino operators seeking to ‘buy’ business market-leading commission or revenue share rates and the junket newcomer may be willing to supply new players without Feature