Inside Asian Gaming

February 2013 | INSIDE ASIAN GAMING 29 and credit from casinos. Junkets will try to churn their working capital (also known as cage capital) as efficiently as possible in order to generate the most rolling-chip turnover with the fixed amount of cage capital. Normally, a junket can turn its cage capital by 6.5-8.0x per month. So with US$100 million of cage capital, a junket can likely achieve a rolling-chip turnover of US$650 million to US$800 million in a month’s time. The “number of turns” a junket can achieve depends on the speediness of the agents in debt collection. During good markets, when there are limited bad debt and players are quick in repaying debt, the number of turns achieved would be higher, while during the down markets, the time required to churn the cage capital will be longer, which impacts negatively on the rolling-chip turnover. Impact of Bad Debt A junket operator’s monthly working capital is affected if debt is not collectible. For example, we understand that during the Asian financial crisis, 70% of the junkets got Cage capital x No. of turns = Rolling- chip turnover Source: CLSA Asia-Pacific Markets Macau Junket Finance Structure III Source: CLSA Asia-Pacific Markets Liquidity Requirement to Fund VIP Revenue wiped out. And during 2009, the number of licences fell 18%. Risk management is important and now implemented more seriously. In the past, players that were refused credit by a casino wouldmove on to other casinos to get credit from another junket agent. This is unlikely now as the junkets have better networks and knowledge sharing. More conservative lending policies by the junkets are good news for investors and Macau’s sustainability in gaming revenue. Understanding the math behind junket liquidity is important. 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). The clear risks lie in the repayment days, which will have a large impact on subsequent months’ working capital. Junket sources we talked to do not see drastic changes in players’ debt-repayment pattern, with the credit cycle remaining at around 10 days with the players. Excerpted from the CLSA Asia-Pacific Markets research report “Still Raining Cash,” authored by Aaron Fischer, Richard Huang, Jon Oh and Clifford Kurz. In Focus