Lion’s Share

Is Macau’s VIP trade being targeted by Singapore?

When Singapore decided to set its tax rate on VIP gross at 5% it appeared to signal a willingness not only to build a new VIP market, but aggressively to attack existing ones. The obvious target, because of its sheer size, is Macau’s VIP trade.

Industry leaders in the former Portuguese-administered territory are aware of the potential competition. Macau’s Chief Executive Edmund Ho has already been lobbied by sections of the industry on the possibility of reducing the near 40% tax on the VIP gross to a more internationally competitive level. Given that Mr Ho’s term of office expires in December, it’s likely he will leave any consideration of such a major policy initiative to his successor.

Regime change

The advantages of a low tax regime in stimulating VIP casino business have already been seen in Cambodia. NagaWorld, the casino monopoly in the country’s capital Phnom Penh, has built a successful medium level junket business (with a US$50,000 upper credit limit) on effectively a zero tax base.

Here’s what Octo Chang, our occasional commentator on VIP play in Asia, wrote in his article on Cambodia, ‘Rolling. Rolling Everywhere’ in September 2007.

“….there is no above-the-line gaming revenue tax in Cambodia, so the casinos in fact enjoy the full 2.52% (or 2.7% if you subscribe to the American belief) theoretical house advantage. The casinos pay the agents 1.6% plus some minor soft costs like free hotel rooms and F&B coupons. Assuming these soft costs add up to 0.4%, the casino still enjoys a net 0.5% hold or a profit margin of 20%.”

Singapore’s modest tax take—as well as potentially guaranteeing the success of the nascent Singapore integrated resort market—may have also been designed to ensure that the multiplier culture that allegedly bedevils parts of the Macau VIP market had no chance of developing in Singapore VIP rooms (not that it would ever be condoned by the operators themselves as they also lose out).

Active versus passive competition

An interesting question will be the degree to which (if at all) the Singapore resorts use active marketing to attack the existing VIP segment in Macau, or whether they end up doing so passively, by default, because of the sheer value of Singapore’s tax offer. It’s possible there may be enough regional VIP trade to feed Singapore without encroaching on the Macau market. Genting Berhad for example, which will operate Resorts World at Sentosa in Singapore, already has a VIP customer base at Genting Highlands.

If the idea of Macau VIP agents migrating with their Chinese clients to Singapore to work with operators there sounds far fetched, consider the following scenario: for every HK$100 spent in a Macau VIP room (in above the table bets), significantly less than the theoretical house edge of circa 2.5% to 3% is finding its way to the casino operator.

In theory of course, using the traditional 40:40:20 revenue sharing arrangement pioneered by Stanley Ho, the government and VIP room/junket operator each get 40% of gaming revenue off the top, and the casino license holder gets the remaining 20%. Subsequent adjustments to that revenue sharing formula have not disguised an underlying reality. This is that the theoretical house edge is the real battle ground in the fight to unlock the value of Macau VIP gaming’s huge revenues, given that much of the gross is swallowed up by fixed costs that may be hard to whittle down.

In the case of the agents and the casino operators, expenses need to be deducted from that gross and in Macau they are typically high. High rollers make the agents and casinos work hard for their business. Agents also need working capital to cover guarantees to the operators; for runs against the house; for bad debt and, of course, to pay commissions to sub agents bringing in business in the form of their own contracted players. Of course the Macau government also has gaming-related expenses to come out of its gaming tax gross—namely the running of Macau’s regulator, the Gaming Inspection and Coordination Bureau, not to mention the cost of infrastructure to move tourists around the territory efficiently. One imagines though that the expense account of the average gaming inspector is considerably more modest than that of the pampered VIP gambler.

House edge

Once all deductions for overheads are calculated, foreign casino operators in Macau typically report net house win of plus or minus 3% on the gross turnover after expenses (i.e. HK$3 for every HK$100 legally wagered). That nominal 3% is subject to stoppages related to incentives and commissions paid to promoters, though the details are normally kept confidential even from shareholders on the grounds of commercial sensitivity.

The fact there’s no consensus among operators and analysts on the theoretical house edge for baccarat means that as with cross-border standards in general accounting, there is considerable opportunity for creative interpretation. In Macau the foreign casino operators have certainly shown a tendency to put a positive spin on house edge.

Mr Chang gave a possible explanation for these variations in his ‘House of Cards’ piece in November 2007.

“How about this—the house advantage assumed on VIP baccarat in the financial statements of Macau casino operators is no longer the long-established 2.5%, nor the more recent 2.7%, but now 3.0%. That appears to satisfy the fund managers and investors that there is still plenty of overhead room, and for the casino business development managers to argue that they can still give some more margin away in return for the promised business.

“Another six months from now, when the other casinos decide that they will not sit idly by and decide to up the bidding war, I guarantee you that we will see the house advantage go up above 3.0 (in fact, some are claiming that their actual win in Macau is 3.0% to 3.2%). And when a lousy quarter or year comes around, they will inevitably call it an abnormality whereas the statisticians will call it a correction that brings the actual results back closer to the theoretical,” stated Mr Chang.

This is effectively what has happened. In the fourth quarter of 2008 for example, Las Vegas Sands Corp. reported rolling chip (i.e. VIP baccarat) percentage win at The Venetian Macao of 2.82% (up from 2.72% in the fourth quarter of 2007). This compared to what the company said was its ‘expected’ rolling chip win percentage of 3.0% (calculated before discounts and commissions).