Inside Asian Gaming

INSIDE ASIAN GAMING | January 2014 24 In Focus VIP Gaming: The Financial Model Excerpted from the CLSA Asia-Pacific Markets research report “Still Raining Cash,” authored by Aaron Fischer , Richard Huang , Jon Oh and Clifford Kurz T here are four key parties involved in the junket VIP gaming cycle: casinos, junkets, agents and players. Casinos provide the gaming facility (gaming floor and tables) and the dealers, while junkets are responsible for filling up the VIP gaming rooms with players from across the region. Credit and commissions are given to the junkets for bringing in VIP players. Junket operators seldom engage the VIP players directly. Normally, the agents are responsible for liaising with the players and, most importantly, collecting cash from them. To incentivize and remunerate the agents, junket operators often extend credit and share commission with the agents. To attract VIP gamers, agents often offer rebates and free hotel rooms to the players. Rolling/Non-RollingWin Rates The win rate is one of the most important operating metrics, whose fluctuation has a significant impact on casino revenue. Two win rates are regularly reported by casino operators: the rolling-chip win rate and the non-rolling-chip win rate. Rolling-chip win rate is usually reserved for VIP play and is the net win divided by the “non-negotiable gaming chips wagered”. VIP bets are wagered with “non-negotiable chips” and winning bets are paid out by casinos in cash chips. As commissions are paid based on the total amount of “non-negotiable chips” purchased, junkets will, from time to time, initiate the players to “roll” their “cash chips” into “non-negotiable” chips for further betting so that they may receive more commissions. The rolling-chip win rate fluctuates between 2.5% to 3.5% (theoretic win rate for baccarat in Macau is 2.85%) and is dependent solely on the luck factor. After each game, VIP players have to exchange their cash chips into non-negotiable chips if they would like to continue, which implies an increasing amount of non- negotiable chips wagered as the players continue to roll, resulting in a range-bound win rate. Win-Rate Reporting/Calculation There are instances where the win rates casino operators report constantly exceed the theoretical baccarat rate of 2.85% (only baccarat is played in VIP rooms). We believe this is due to the accounting of the win/hold rate, which includes cash play. Take a casino with US$100 million total VIP rolling volume as an example—since the win rate usually fluctuates around the theoretical win rate of 2.85%, the casino should report VIP revenue of about US$2.85 million. In the case where cash play is involved (assuming cash play is 10% of total VIP volume), the VIP revenue reported will be US$2.85 million. However, the win rate reported, as required by DICJ, is based on rolling-chip volume. Thus, the effective win rate reported would be (US$2.85 million/ US$90 million) = 3.17%. Junket Commission Structure In Macau, there are two major types of commission-rate structures: rolling chip-based and revenue-based. Rolling-chip-based commission is a simpler commission-rate systemwith casinos paying 1.25% of the rolling chip to the junkets as commission. The commission income received by a junket will not be correlated to the rolling chip win rate, allowing a more stable income stream. The revenue-based commission system has the commission tied to the rolling-chip win rate, resulting in a more volatile earnings stream. According to the example above, the junket has lured in US$100 million of rolling chip for the casino and the revenue to the casino would be the same regardless of the commission structure adopted. The commission the junket receives will, however, change significantly if a different commission system is used. The junket would receive US$0.79 million of commission if the casino enforces the revenue-based structure or US$1.25 million (58% higher) if the casino adopts the rolling chip-based system. Currently, most casinos adopt the revenue-based commission system so as to share the risk of win-rate volatility with the junkets. The revenue-based commission offered to the junkets varies between 40% and 50%, with established casinos, like Wynn Macau, offering commission near the lower end of the band. According to our industry sources, Melco, Galaxy and Sands are the only casino operators that are still offering rolling chip based commission. Junket Financing According to the junkets, their working capital is financed by shareholder’s capital, external borrowing, third-party investment and credit from casinos.