Inside Asian Gaming

INSIDE ASIAN GAMING | December 2012 32 By increasing overall business volume. Based on the “law of large numbers”, as the number of bets per hand at any given level wager increases, the actual outcome will move closer to the expected outcome. Reduce risk exposure . Casinos can limit their risk exposure by setting a maximum betting limit, which forces more hands to be played at any given bankroll. Shifting or sharing risk . Revenue-share arrangements with Macau junket operators (at predetermined percentages of 40-45%) versus a rolling program can also reduce earnings volatility. The casinos have a fairly simple cost structure: • The gaming tax is the largest component at 39% of the gross gaming revenue. This is very high relative to other markets (e.g., Singapore at 16-17%, Las Vegas at 7%) and we do not see a high risk of the tax increasing. • The second-largest cost component is the junket commission, which is 40-45% of the grossVIP revenue (notmassmarket revenue). There is agreed maximum commission cap of 1.25% and therefore we do not expect this to increase. • Other operating expenses include staff costs, utilities, advertising and promotion costs. The mass market generates margins of about 40% while VIP is around 10% due the inclusion of junket commissions. Hotel operations Hotel operations are simple, with the company charging a fee for hotel-room usage. With the strong inflow of visitors into Macau, hotel operators have enjoyed high hotel occupancy of more than 90% and have been able to charge high hotel room rates of US$200-300 per night. Retail operations Some of themajor Macau casinos such as Wynn Macau, Four Seasons Macao, Venetian Macao and City of Dreams have large retail shopping areas in their integrated resorts. The retail segment generates revenue by charging the tenants fixed rent or turnover- based rent. In 2011, Sands China’s retail properties generated HK$12 billion in retail sales and HK$1.3 billion in rental income, which is largely in line with what Times Square, a premium shopping mall in Hong Kong, generates. VIP and other elements Junkets assume a key role in Macau’s VIP gaming operations. The key reason for the existence of the junkets is the China central government’s currency restrictions, limiting currency movement into and out of the country. Owing to the restrictions, most VIP players rely on junket credit to fund their gaming expenditure. China also lacks a robust credit database, prohibiting casinos Buffett-style analysis Macau gaming: Revenue and Ebitda breakdown by segment, 2012 Ebitda breakdown by segment, 2012 1 TheWarrenBuffett Way, Robert Hagstrom;The New Buffettology, Mary Buffett and David Clark Source: CLSA Asia-Pacific Markets Source: CLSA Asia-Pacific Markets IN FOCUS