Inside Asian Gaming

January 2014 | INSIDE ASIAN GAMING 25 In Focus Attracting and Working With VIPs G iven the illegality of marketing gambling in China, junkets and agents are critical to bringing VIPs to Macau. Their methods include personal introductions, social networking, and a growing system of VIP clubs. “You can think of the junket network as the foot soldiers of a multi-level marketing strategy,” says a leading figure in the industry. “They have thousands and thousands of people in China. In each province and each city, they know all the important people, and by knowing them they have a way to help these ‘customers’ to come to Macau and gamble.” He also says the network of junket-associatedVIP clubs is growing within mainland China, and that these clubs offer many facilities for 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. Cage capital x No. of turns = Rolling-chip turnover 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 debts 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 wiped out, while during 2009, the number of licenses fell 18%. Risk management is important and now implemented more seriously. In the past, players that were refused credit by a casino would move 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 for 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. patrons’ convenience. “Typically they have Internet facilities, they have massage facilities, and they have theatres. In every town in China, the VIP entertainment industry is booming. “Many of the junkets actually have their service center at these clubs, as a way to acquire VIP customers. Once VIPs become members of these clubs, then transport can be organized so that they can easily come to Macau and gamble,” explains the insider. Recruitment of the Chinese high roller is a wasted effort, though, without the ability to organize credit for their gambling trip. “The junket operators provide this key service of facilitating the flow of funds. Sometimes VIPs have to sign something, sometimes they may have to provide a symbolic deposit in the form of a check