In its authoritative report on the Macau gaming industry, “Still Raining Cash,” leading regional independent brokerage and investment group CLSA Asia-Pacific Markets details the workings of the still-dominant VIP sector
There are four key parties involved in the junket VIP gaming cycle, including the casinos, junkets, agents and the 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-Rolling Win 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 “nonnegotiable 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 player 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%.
Non-rolling-chip win rate is usually reserved for the mass gamers and is the net win divided by the table drop (amount of chips bought). As cash chips are used for non-rolling-chip games, the same patch of chips are being recycled between the players and the house and no incremental chips are added to the pool as the player bets.
Theoretical win = Average bet x hours played x decisions per hour x house advantage
Unlike rolling-chip win rate, non-rolling Chip win rate varies across casino properties and is dependent on the average bet size, players’ length of play, speediness of the game and the house advantage. House advantage is very standard across the Macau casinos as baccarat dominates gaming activities. Speediness of the game is also largely the same across casino properties that have fully ramped up. The major differentiation among casinos is the average bet size and the players’ length of play. Quality casinos normally have players that bet larger and stay longer at the premises. These casinos, like The Venetian, can achieve a non-rolling chip win rate of over 25%.
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 system with 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 rollingchip win rate, resulting in a more volatile earnings stream. According to the example in the above table, 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 junket receives will, however, change significantly if different commission system is used. The junket would receive US$0.79 million of commission if the casino enforces the revenue-based structure. The commission will be US$1.25 million (58% higher) if the casino adopts the rolling chip-based system.
Currently, most casinos adopt the revenue-based commission system 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.
According to the junkets, their working capital is financed by shareholder’s capital, external borrowing, third-party investment 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.
Cage capital x No. of turns = Rollingchip 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 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 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 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 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.