Macau government claims of controls on table numbers and junket commissions look a little frothy, explains Ben Lee
Investors and analysts have been burning the telephone hotlines to Macau in the last few months asking two questions: “What will be the effect of the gaming table cap on future revenue growth?” and “Is the junket commission cap (1.25%) in place?”
On the first issue, the honest answer should be “who knows?” There are too many variables and questions implicit in that one sentence.
Here’s one reading of the numbers. At the end of the first quarter this year, the Gaming Inspection and Coordination Bureau (DICJ), Macau’s gaming regulator, said there were 4,811 tables in the Macau market. It didn’t specify if that was tables merely ‘allocated’ or active on the floor.
In mid-April, Encore at Wynn Macau opened, adding 61 tables to the market. Assuming for a moment the original figure of 4,811 was for currently ‘active’ tables rather than merely ‘allocated’ ones, then the Encore opening brought the total number of active tables in the market to 4,872. By that reading, in order for the market to stay within the 5,500 cap announced by the government in May (due to take effect between now and the end of 2012), that would leave only 628 tables for new openings. And there are two whopping properties due to open before the end of 2012—Galaxy Macau, Galaxy Entertainment Group’s (GEG) flagship resort on Cotai, expected to be ready by the end of the first half of 2011, and part of Sands China’s Cotai five and six. Sources close to GEG say the company is ‘comfortable’ it will get at least 400 tables for Galaxy Macau. That leaves Sands China potentially with only 228 tables with which to populate the first phase of Cotai five and six.
Given the current uncertainty over yet another variable—the number of migrant construction workers that Macau will allow in to work on Cotai five and six—the most optimistic scenario on Sands China’s project is that only part of it will be ready by the end of 2012. Given the size of the scheme, however, even a first phase opening should comfortably swallow up 228 tables and still be hungry for more. Michael Leven, President and Chief Operating Officer of parent company Las Vegas Sands Corp, told Inside Asian Gaming recently that if necessary, Sands China will take under-used tables from elsewhere in its Macau operation to stock Cotai five and six. Confused yet?
Macau’s table cap—a summary
So for the sake of readers’ mental health, here’s a quick recap of some of the basic issues regarding the government’s supposed table ‘cap’.
1. Did the government—in arriving at a maximum table tally of 5,500 in the market between now and the end of 2012—count the actual number of operational tables and classify them as ‘existing’ tables? Or did they just tally up the number of tables that were preapproved for each property?
2. And if it was the latter, can the operators move tables from one property to another?
3. What about a suggestion (from a senior Macau gaming executive) that SJM’s quota has already been negotiated at 1,700 tables and would not be subject to this restriction?
4. Does the government actually want Cotai lots five and six to be completed? If so, the 530 tables that Galaxy want for their Galaxy Macau project on Cotai plus the 500-600 tables Sands China needs to justify their huge investment on Cotai lots five and six definitely do not come within the number of new tables permitted.
5. Is this table cap issue driven by the way of clamping down on the outflow of money into foreign hands?
6. And at the end of the day, does the Macau government really feel that it owes an obligation to the international community to safeguard their investments, or are its priorities inclining more towards keeping the people immediately above and below them happy?
So how do the operators work their way out of this murky bind? There is an ancient, wise Confucian saying that has been circulating for millennia—”When in Rome… “.
The commission ‘cap’
The second and almost played out issue of a junket commission cap should be viewed in its entirety from the beginning of the saga to the current status quo.
The ‘Big Bang’ of liberalisation in the Macau gaming market began in 2004 with the opening of Sands Macao, the first foreign owned, mass-market property. After a two-year lull, as the other foreign operators beavered away on their construction projects, the foreign invasion really began, with Wynn Macau opening in September 2006. The foreigners brought some Las Vegas glamour to Macau, with their glitzy properties, stylish entertainment offerings and fleets of sleek black limousines. Even more importantly, Wynn Macau started seriously competing with Stanley Ho’s SJM for junket business. It was probably no coincidence then that in September 2006, Dr Ho bemoaned the rise of junket commissions brought about by the new comers Galaxy and Sands (junket commissions went from 1% to 1.25% as both Galaxy and Sands battled each other to see who could poach the greater number of junkets away from SJM), claiming they were forcing some of his VIP rooms toward bankruptcy. To which, Mr Adelson growled that famous line echoing US President Harry S. Truman: “If he can’t stand the heat, get out of the kitchen.”
The Amax effect
Fast forward to late 2007, when after six months of poor business, the casino at the former Crown Macau, now Altira, launched its new “creative funding” 1.35% commission agreement with AMA International, a junket consolidator majority owned by Hong Konglisted Amax Entertainment Holdings Ltd.
Ironically, Amax Entertainment happened to be a 49.9% owner of Crown Macau’s competitor from across the road, the VIP-focused New Century/Greek Mythology casino, whose close links to Stanley Ho are well known, not least because SJM supplies the gaming licence for the property.
One could say that in tacitly giving his blessing for the Amax-Crown Macau commission deal, Dr Ho may have killed two proverbial birds with one stone—i.e., provided a white knight for his son Lawrence Ho, co-chairman of Crown Macau’s owner Melco Crown Entertainment (Nasdaq: MPEL), and at the same time demonstrating to the foreign newcomers (in a controlled, calm, Chinese kind of way, of course) that he can himself ‘turn up the heat in the kitchen’. Some have even suggested that a third ‘bird’ suffered collateral damage from Dr Ho’s single and well-aimed ‘stone’ in that the Amax deal gave SJM a back door into Crown Macau at no cost whatsoever to SJM.
Peace and profit sharing
It was shortly after that that the Western operators themselves started complaining about the “unreasonable competition” posed by Crown Macau, and gracefully accepted the Macau government’s offer to broker a ceasefire, with none other than Dr Ho himself in the chair.
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Taking stock of where the Macau VIP market is today, the 1.25% cap is ostensibly in place, or is it? The one issue that was deliberately left off the junket commission cap discussions was the issue of profit sharing.
Profit sharing, for the uninitiated, is an alternative junket arrangement where instead of the casino paying the junket operator commission based on rolling, the former agrees to split the win/loss result from designated VIP rooms with the latter. You could almost say that it is a business partnership; however we will leave that one to the New Jersey Gaming Commission to reflect on.
Profit sharing started with what is known as the 40:40:20 model, which is the core business model for SJM and has since spread to the other casino operators. Simplistically, the government gets 40% of the gaming revenue in the form of tax; the casino owner (or VIP room owner) gets 40%, leaving the casino operator with 20%.
In another form, if we accept that the theoretical house win (we can view this alternatively as profit margin on turnover) on the most common game, baccarat, is 2.85% as argued by some, then the following split would be shared out of every dollar that is bet:
Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way…”
In a theoretical land far, far, away from the Macau peninsula, there is talk amongst some theoretical junkets that the town on one side of the street is offering a 45% profit share, whilst their neighbouring city is giving away 47%.
And the reason for giving away their margin is plain old competition. When the numbers are what matters, and there are rumours that some of the casinos on the peninsula are even offering 50% profit share, one has to question if the junket commission cap is but mere window dressing for the foreign investors. As an ancient Chinese proverb goes: “Be like the duck”—serene and calm to all, but paddle like hell underwater. It is certainly getting warmer here in Macau again.
