Inside Asian Gaming

inside asian gaming January 2016 32 Blast from the Past percent and 1.62 percent. Any commission rate above that range creates a situation where baccarat players as a group, betting on any combination of player and banker (but not ties), would not generate enough losses to cover the commission rates and the tax obligations. For commission rates above this range, the casino concession holder would be losing money on every banker or player wager. On a revenue-sharing basis, recent Macau street talk suggests that SJM may be offering a 45/55 structure to certain junket operators who then agree to cover all operating costs, leaving SJM with only about 5 percent of gross revenues after paying taxes and levies. In such an instance, SJM would bear no direct costs and would act as an intermediary only (effectively acting as a landlord for their VIP rooms). Their thus-residual share of gaming win would have to cover the cost of capital and maintenance of their casino facilities, as well as any remaining returns on investment. Realistically, when margins get this thin, other contractual arrangements would be necessary to ensure the financial viability of the concessionaire’s casino. It is not hard to see how some operations — either through lack of volume, bad luck in the volatility arena, or an inability to come to survival terms with junket aggregators — may indeed fall by the wayside in the competitive Macau marketplace. Competition, Credit Related issues to commission rates are competition and credit availability. Significant cutthroat competition among different junket aggregators and consolidators might emerge as such organizations compete to sign up the most profitable junket operators — those with access to the biggest players — to meet their monthly targets. To attract the biggest players, many junket operators extend credit facilities to players. If their contracts call for rolling chip turnover targets each month, the junket operators may over-extend such facilities, especially to new or high-value players, in attempts to secure higher business volumes. While the casino concessionaires are presently somewhat insulated from the consequences of such activity, there is a real prospect of a “bubble” in VIP revenues occurring as a result. This is particularly relevant in times of general economic uncertainty or distress, where some players may gamble beyond their means in attempts to cover their losses from financial markets or from their own businesses. Furthermore, pressure may be exerted on some concessionaires to extend credit to junket operators or even consolidators to continue to fuel the growth in volume at the baccarat tables. Thus, while credit risk for concessionaires seems to be relatively insignificant at present, the prospect of a shift in credit risk from junket operators to concessionaires could result in increased bad and doubtful debts coming onto the concessionaires’ books. Once again, this raises concern among investors, analysts and other outside observers. It is also worth noting that the recent activity of the junket aggregators has been fueled to some extent by the liquidity brought into the system from stock market listings on the Hong Kong exchange. This has enabled junket aggregators with access to public equity to be more liberal with credit and capture the business of sub- junkets by offering higher commissions and also extending their balance sheet assets to these groups. In such circumstances, the sub-agents are able to offer credit with less rigorous principles governing their lending decisions. The growth of the junket aggregator model beyond AMA International and other players already in the game may be limited in the near term by current economic conditions and a lack of market for any further IPO listings at the present time. Nevertheless, these competitive responses not only demonstrate the dynamic of the Macau VIP market, but also suggest continued volatility in market share of the VIP sector. Costs and Constraints The fourth “C” in this group is costs. Commission-related expenses and prospects of bad debt are not the only costs that are increasing in Macau. Labor costs have increased substantially over time, as have the costs of many other inputs into the integrated resort casino business. Furthermore, rising prices for steel, cement and sand have driven up construction costs for Macau’s mega-casinos under construction. These inflationary pressures are part of a global phenomenon, related at least in part to increasing oil prices and the demands on The Rio Sands Macao June 2008