In the second of two essays, respected US-based gaming journalist James Rutherford discusses more of the key features of the red-hot Macau and Singapore casino markets
VI. The “Hungry Tigers”
Much has been made of the alleged aversion to machine gambling among Asian players generally and the Chinese in particular. Slots in Macau used to be known as “hungry tigers,” a pejorative suggesting at best fear and at worst distrust. That’s probably because during the days of STDM—Dr Stanley Ho’s gambling monopoly—slot machines were merely a device for wringing any remaining change out of table players on the way out of the casino. The return to player (RTP) was horribly low (estimated at 60%), the machines were old and uninviting and their reputation among consumers was correspondingly poor. Macau’s current slot offering—including that of STDM’s successor, SJM—bears no comparison to the gloomy, wall-mounted, electro-mechanical monsters from yesteryear.
Since then the major slot suppliers from the United States, Australia, Europe and Taiwan have brought to Macau the very latest electronic ‘mousetraps’ with all kinds of bonus features and storylines to hold players’ attention. And thanks to the competition between the Macau casino operators, those mousetraps have been marketed much more effectively both overtly—via the development of carded play—and covertly, through dramatic improvements in RTP. Although there is not yet a mandated jurisdictional minimum RTP in the manner of Singapore, it’s generally accepted that in Macau no machines offer lower than 85% RTP.
The growth of carded play—after reported initial consumer resistance from some mainland Chinese visitors—has created a new value proposition for regular slot players in Macau. Some locals-focused venues have found that groceries and grocery vouchers are very popular forms of loyalty reward with downmarket customers. Among more affluent slot players in the smarter casinos, high-value, high-status consumer goods such as cognac and iPads are the preferred type of player rewards.
Machine play accounts for under 5% of gaming revenue in Macau, compared to around 60% of gaming revenue in Las Vegas. There were 15,900 slots and EGMs across Macau’s 34 casinos as of the end of the third quarter, according to figures from Macau’s gaming regulator, the Gaming Inspection and Coordination Bureau (DICJ). In 2010, Macau’s then total of 14,050 machines generated MOP8.62 billion (US$1.07 billion) in revenue. During the same period, Clark County, including the Las Vegas Strip, had 197,144 electronic machines—more than 12 times as many as Macau—distributed across 1,700 licensed gambling premises. They generated revenues of US$6.6 billion, according to the Nevada Gaming Control Board. In other words, Las Vegas had 12 times as many machines as Macau in 2010, but they were only generating six times as much revenue as Macau. Even though playing slots is still a minority pursuit in Macau, it seems that those that do play, play hard and play to win.
It’s possible that with no new Macau property openings in the fourth quarter of 2011 that the number of slot machines in the territory may actually fall slightly from 3Q levels. That’s because Wynn Macau removed more machines from its main floor in early October to make way for Megstar—yet another VIP baccarat junket operation.
The current soaring growth of the live table market in general and the VIP segment in particular make it commercially impossible for operators to ignore that consumer demand. But slots are still Macau’s biggest revenue generators after live baccarat. They were good—as mentioned— for US$1.07 billion market-wide in 2010. Given the turbo-charged 47.5% year-on-year growth in Macau live table baccarat revenue to the end of September, slots have actually performed strongly in 2011. By the end of 3Q 2011, aggregate slot revenue had reached MOP8.38 billion (US$1.04 billion). That was nearly as much as for the whole of 2010 and a 34.9% increase year-on-year on the revenue achieved in the first three quarters of 2010.
Average daily win per device in Macau ended last year at a respectable US$210, stacking up favourably with comparisons to a machine-centric day-trip market such as Atlantic City (US$241) and the Las Vegas Strip (US$159). The Venetian Macao’s 2,057 slots had an average daily win per device of US$303 in the third quarter of this year while Sands Macao managed US$280 per unit per day from 1,109 slots and The Plaza managed a whopping US$766 per machine per day—admittedly from a small universe of 182 slots catering for a mainly VIP audience. The real slot performer for Las Vegas Sands Corp as a group, however, was Marina Bay Sands in Singapore. Its 2,416 machines achieved win per unit per day of US$662 during the third quarter.
VII. Rating the Tables
Singapore’s Casino Regulatory Authority hasn’t licensed any junket operators to date, but it’s possible it will. Some observers believe international VIP play will soar once it does. An immediate revenue bump of 30% is possible, according to some. The importance of the high end is acknowledged at policy level by the Singapore authorities in their decision to institute a lower tax rate on revenue from so-called “premium play” (play involving check-ins of S$100,000 and up). The effective tax rate on VIP play in the Lion City is 12% (5% gaming tax plus 7% Goods & Services Tax) versus 22% on the mass (15% gaming tax plus 7% GST). There’s a statutory ban on issuing Singaporeans with credit for gambling in the mass market—but Singaporean citizens and permanent residents who are high rollers are exempted from the provisions.
Even without junkets, things are progressing nicely in Singapore. Rolling chip (i.e. VIP) volume at Las Vegas Sands Corp’s Marina Bay Sands was a record US$16.72 billion in the third quarter. That compares to the US$24.77 billion rolling chip volume achieved by Sands China in the same period across three Macau properties that all have junket partners. The gross gaming revenue generated at MBS by the VIP and mass-market live tables combined in the period was US$450.4 million. A further US$201.5 million came from slot revenue, giving a total casino revenue of US$651.9 million, split 69% to 31% in favour of live table gaming over slots. MBS’s market rival, the Singapore-listed Resorts World Sentosa, doesn’t give a breakdown of how its gaming revenues are derived, but some analysts estimate the live table to slot revenue split as at least 60:40 in favour of live table play. In the Macau market as a whole, the revenue split was 96% to 4% in favour of live tables over slots during 3Q 2011.
At Marina Bay Sands, the average daily win per table (before discounts and commissions) in 3Q 2011 was US$13,205. At The Venetian Macao during the same period it was US$11,705. Over at LVS’s Las Vegas properties it was US$5,267, though the Asian property averages are skewed by the volume of high roller play.
VIII. Silent Partners
The growth of the VIP market in Macau is a testament to the efficiency and efficacy of the third-party promoters and junket operators at bringing in high rollers from mainland China and beyond. That in turn has helped to stimulate and service the investment of billions of US dollars in the local gaming infrastructure. VIP baccarat is by far the biggest contributor to gross gaming revenue in the territory. It accounted for MOP135.6 billion of the MOP188.3 billion (US$23.5 billion) gross generated from games of fortune last year—a whopping 72% of the tally. As early as September this year, cumulative GGR for 2011 passed the all-time record achieved in 2010. Mostly that was due to VIP baccarat.
The junkets and their agent partners are the industry’s most lucrative link with mainland China, from where most of the new VIP players come. In China, casinos are technically forbidden by law to advertise and market their services. In addition, gambling debts are technically not enforceable and there are limits on cross-border currency movement. In a moment we’ll discuss why—as so often in China—there tend to be exceptions to these supposedly hard and fast rules.
But before discussing some of the mechanics of the junket trade—and how those mechanics differ from popular public perception—it’s worth remembering the bigger picture. The junket sector is in effect the local industry’s credit broker. Without it the market would be only a fraction of its current size. The casinos couldn’t have handled the credit exposure needed to fuel hundreds of billions of dollars in rolling chip turnover. More specifically, they—or rather their investors and regulators—wouldn’t have tolerated the commercial and ethical risk involved. The casinos don’t have the network and depth of connections in mainland China to be able to collect on player losses. The junket operators do what the casino operators cannot—vet Chinese players for creditworthiness (in a country that doesn’t yet have a national system for personal credit ratings). The junkets also organise the issuance of credit and assume the market risk for that credit. The junket system organises gambling cash for people the casinos don’t know and who in some cases don’t want to be known by the wider community.
Not surprisingly, competition among the casino operators for the services of the junkets is intense. The casinos often provide the junkets with enticements beyond the standard industry incentives programmes, i.e. either commission on rolling chip turnover or share of casino net VIP win. The extra incentives can include contributions to junket cage capital and subsidies on or gratis use of facilities such as hotel suites (known as ‘comps’ in the trade) for the junkets’ VIP players. In addition, the operators may absorb some of the cost of rebates on player losses. These forms of assistance are all a function of the tussle among the six concessionaires and sub-concessionaires for high roller business. In 2002, when Dr Ho still had an effective casino monopoly, the average commission rate on VIP chips in Macau was 0.7%. By 2008, it had crept up to an average of 1%. Then, in December 2008, Crown Macau (now Altira)—desperate for players after failing to make an impression in its chosen VIP segment—broke all commission records by offering junket consolidator AMA International a rate of 1.35% on rolling chip turnover.
Eight months later—after a frenetic period of competition between operators attempting either to match Crown Macau’s headline commission rate or to structure incentives packages that added up to more or less the same thing—the Macau government belatedly drafted a regulation to cap commission levels at 1.25%. There appeared to be consensus in the local industry that this was a sustainable level for junkets and operators given the low house edge on baccarat. The threat of imminent commission capping didn’t make much difference. The junket circus quickly moved on to a revenue share model with the casino operators. So the price war raged on largely unabated—just on a different battleground. The most aggressive operators have reportedly been operating on a 47:40:13 model—i.e., up to 47% of house net win going to the junket, another 40% going to the government in the form of gaming tax, and the remainder retained by the operator.
In Singapore—where junkets have yet to be licensed—a spokesman for Genting’s property, Resorts World Sentosa, has called junkets “integral” to the market’s “international success.” It’s been alleged, however, in the mainstream and trade media that there are already quasi junkets operating informally in Singapore—without the acquiescence of the operators or permission from the Casino Regulatory Authority—possibly fronting as travel agents and providers of luxury concierge and leisure consulting services.
Macau’s casinos promoters and junket operators must be licensed by the Gaming Inspection and Coordination Bureau (the DICJ, as it’s known by its Portuguese initials), which regulates the casino industry and all games of chance in the Special Administrative Region under the auspices of the Secretariat for Economy and Finance.
It is the bureau’s responsibility to “examine, supervise and monitor the eligibility” of the promoters, their partners and key employees and their “activities and promotions” for compliance with applicable law. Currently, 155 companies (colectivas) and 38 individuals (singulares) hold licences.
The promoters had no such formal status under the Portuguese administration, and the influence of the criminal gangs known as ‘triads,’ originating mostly from Hong Kong, was—according to Western gaming regulators—pervasive in Stanley Ho’s VIP rooms in the waning days of the colonial period leading up to the 1999 handover. That’s why they blocked him from having gaming licences in Australia and the US. The US State Department’s International Narcotics Control Strategy Report 2011 continues to stick to this line. It classifies Macau as a “major money laundering” territory and a “jurisdiction of primary concern,” zeroing in on “loosely-regulated gaming promoters”.
Dr Ho has never been charged with any wrongdoing, but allegations of triad associations have dogged him for decades. In 2009, the New Jersey Division of Gaming Enforcement concluded four years of investigation by finding his daughter Pansy Ho “unsuitable” as a business partner for US-based MGM Resorts International on the basis of her business ties to her father, who granted her—via his casino operating concession Sociedade de Jogos de Macau SA—the gaming sub-licence for MGM’s Macau casino. MGM responded to the New Jersey investigation by promptly announcing an exit from its Atlantic City operation—placing its 50% interest in the Borgata Hotel Casino into a trust for sale.
Interviewed as part of a Reuters exposé published in March of this year on criminal influence in the industry, DICJ chief Manuel Joaquim das Neves remarked, “I cannot say that in Macau we don’t have triads, but things are under control.”
But if the history of organised crime proves anything, it’s that when criminals or those skating on the edge of legality have a chance to go legitimate—or at least cover their activities in a cloak of legitimacy—they will take it. It’s a lot less risky and generally more profitable. That may have happened in the case of the triads’ alleged historical role as issuers of Macau casino credit and collectors of player debts.
According to Macau industry sources, junket-related businesses have in the last few years been setting up as licensed moneylenders inside the People’s Republic of China, using player assets as collateral for personal loans which can be drawn over the border in Macau and then used for high roller play in the casinos. This system has multiple advantages. One is that it gets around the effects of macroeconomic policies imposed by Beijing on mainstream Chinese banks—policies that are designed to cool commercial lending and subsequent asset speculation. As money lenders or credit brokers, the junket-related businesses are operating half in the mainstream economy (in terms of the debts being formally recognised by the Chinese courts) and half in the informal banking sector (in that the mainstream bank rules on allowed levels of leveraging and personal collateral required need not be applied). It looks like a typically pragmatic Chinese approach to a set of commercial and ethical issues (what the Chinese sometimes refer to as ‘one eye open, one eye closed’).
But even if the process of moneylending for Macau casino gambling has gone respectable, it’s still a delicate political issue. Direct casino taxes supply more than 80% of public revenue in Macau, and the junket operators and promoters are the engine, supplying the credit without which the industry couldn’t exist at the scale it does today. Indirectly, they are the government’s principal source of money. In a confidential State Department cable published by WikiLeaks earlier this year, Steve Jacobs, former CEO of Sands China, described their political influence as “significant”.
The taint has followed them to Singapore. The government there has expressed concern about an historical linkage between external junkets in Asian casinos and criminal influence. The Casino Regulatory Authority (CRA) appears, therefore, to start from the position that no individual or entity is entitled to a casino junket licence unless they can prove otherwise. The CRA has devised a stringent system of licensing and monitoring for them. It requires a level of disclosure from applicants and the casinos regarding their activities and business arrangements that effectively does away with the anonymity junkets and their players enjoy in Macau. How this will work in practice remains to be seen. No licences have been issued to date, although it’s been reported that at least three operators have applied.
X. More Licences?
The concessions the Singapore government granted to Genting and Las Vegas Sands in 2006 run for 30 years with a 10-year guarantee of exclusivity that expires in 2019. A year and a half into the experiment, the two resorts, representing a combined capital investment of about S$14.6 billion (US$11.3 billion), appear to be driving increases in foreign visitor numbers and tourism spend that are handily exceeding expectations. If that turns into a long-term trend, and gambling-related social problems don’t increase to the point where they become a political liability, it is entirely likely that more licences will be granted.
The issues are more complicated in Macau, where the explosive scale and pace of resort development has saddled the government of the SAR with a host of employment, housing and infrastructure problems that are elevating the potential for social unrest and occasionally drawing unwanted attention from Beijing. Until those issues are resolved, it is difficult to imagine how the government could justify any more licences. At the same time, it might prove legally and logistically difficult not to renew the six existing concessions and sub-concessions when the first of them start to become eligible for early redemption from 2017.
The present administration of Chief Executive Fernando Chui Sai On is aware of the need to do a better job of managing market and general economic growth than in previous years. He acknowledged as much in his annual policy address in mid-November. But he has been broadly consistent with his predecessor, Edmund Ho, in terms of keeping fluid the government’s relationship with the big resort operators. This approach involves some conflicting signals on just how many more casinos from existing concessionaires will be allowed on Cotai after the completion of Sands Cotai Central (a.k.a. Cotai 5 & 6) and when they will be allowed. Wynn Resorts has indicated it has been granted Cotai land rights in principle—though no timetable for construction has yet been announced. Melco Crown Entertainment is also hopeful of gaining a firm ‘yes’ on a broad brush approval originally given to the stalled Studio City site. SJM recently indicated it had been told it could have a Cotai site, and MGM China also expects to be granted development rights on Cotai.
In an effort to get a better handle on whom its licensees actually are, and to stop casino proliferation by the back door, the government says it has banned any more third-party operating agreements. That means in theory SJM can’t issue any more sub-licences from its main gaming licence in the manner that it has been doing since monopoly days. That resulted in a market where 14 of Macau’s current 34 casinos (i.e. 41% of them) are actually managed by third parties. The idea of the policy is not only to prevent proliferation but to improve market transparency. Whether the policy will be implemented effectively, time will tell.
The government is also—possibly with an eye on political approval from Beijing—increasingly focusing on measures aimed at responsible gambling and mitigating any negative social effects of gambling within the local population. Promised restrictions on slot arcades in residential areas have yet to materialise, although there is talk of a regulation being published early next year.
On the topic of market intervention, the more that is written and spoken about the table cap and its reported extension to 2020, the more confusing the picture seems to become. Most commentators have interpreted the new policy as meaning a maximum 3% compound annual growth market-wide from a first quarter 2013 baseline of 5,500 tables, as set out in the original table cap policy. But Steve Wynn, Chairman of Wynn Resorts, seemed to throw a spanner in the works recently when he said in comments reported by the South China Morning Post his understanding was that the 3% CAGR figure referred to existing casinos, not to any new ones that might be built. His remarks left a nagging impression that people in government were saying different things to different people. Perhaps when officials had more time to crunch the figures following the September policy announcement by Francis Tam, the Secretary for Economy and Finance, they realised that an absolute market-wide 3% CAGR cap in table numbers between 2013 to 2020 would make it nigh impossible to support the number of proposed new Cotai projects. Perhaps that highlights the dangers of government by nod and by wink.
James Rutherford is a freelance writer and editor based in Atlantic City, New Jersey. He is a former editor at Casino Journal and a former International Editor and Senior Writer at International Gaming & Wagering Business.