Commission caps and the bottom line

Bill Lerner, formerly of Deutsche Bank and now of the specialist consultancy Union Gaming, has put some useful metrics on exactly how much Macau casino operators’ bottom lines could benefit from the recently-agreed 1.25% VIP commission cap.

“We’ve applied the new commission cap to our models and we estimate the following incremental 2010F EBITDA by operator,” says Mr Lerner.

“Galaxy HKD189 million, or +21% at corporate level; SJM Holdings HK$515m, also +21% at the corporate level; MPEL US$33m, or 13% at corporate level; LVS US$56m, or 4% at corporate level; MGM (not meaningful); WYNN US$0m (never raised commission rates).”

Anyone with the time and patience can probably work out from that model (based on gross rolling chip turnover per operator as declared in financial statements) what commissions the operators have been paying pre-cap.

The government says the new capping rules will come into effect from 9th September. The authorities say the system will not be a paper tiger. Sanctions available to the government include: fines for failure to issue reports on commissions paid; fines for failing to follow agreed reporting rules, and fines for any breach of the commission cap. The latter offence can also result in up to six months’ suspension of a junket’s licence, or even cancellation of said licence.

But as reported recently, in the complex network of contracts and sub contracts that make up the world of Macau junkets, there are other ways of creating incentives for sub agents or agents, without it showing up in headline rolling chip commissions. The issue is whether that incentive or solicitation can be tracked back to the doorstep of the main junkets or individual operators.

Don’t be surprised if the Gaming Inspection and Coordination Bureau (DICJ), Macau’s gaming regulator, starts advertising for forensic accountants quite soon.