Inside Asian Gaming

January 2008 | INSIDE ASIAN GAMING 27 expressed increasing concern about the venture’s financial gearing, given that it had to pay more for part of its project debt than originally hoped and that its Cotai resort City of Dreams is still more than a year away from its first phase opening. Gamble In that context, Crown Macau’s offer of 1.35% commission on VIP rolling chip sales made to AMA International—a company majority-owned by Hong Kong-listed A- Max Holdings—looks a little more punch drunk than poker-faced. It’s clear though that Crown Macau is setting itself on a very well defined path as the VIP niche product in Macau, and aggressively challenging the other casino operators for their VIP business. AMA’s nine junket collaborators have agreed to bring their high-roller VIP clients exclu- sively to the Crown Macau. A-Max’s chief executive Ted Chan recent- ly described his company as akin to a central bank for junkets.The basic business model is that A-Max signs up junkets and acts as their agent, using its stock market listing to raise cash from investors to buy VIP chips in bulk. It uses its bargaining power with the casinos to negotiate competitive discounts on those chips—better rates than the junkets could manage on their own—then sells the chips on to the junkets for a commission, but at a cost that is still advantageous to the junkets. The system also provides the junkets with more liquidity than previously, as they do not need to tie up capital in unused chips but can operate on a ‘just in time’ model, drawing down chips as required by the high roller. The junkets can utilise that freed cash to offer extra incentives to their players if they wish, either by writing down or defer- ring payment on player losses or extending credit facilities. The idea is this then pushes up turnover at the table. Good start From A-Max’s perspective, the gamble seems to be paying off. A-Max started mod- estly with a share placement in December to raise cash for HK$2 billion-worth of VIP chips from Crown Macau. After just a day and a half of operation under the new sys- tem, the company said it had sold nearly HK$4 billion in VIP gaming chips at Crown Macau. This was nearly equivalent to 25% of Crown Macau’s total monthly turnover for November. If that rate can be sustained, it would mean Crown Macau turning over HK$74 billion per month in VIP chips. Chip turnover for the entire Macau VIP market is currently estimated by analysts to be US$150 billion per month. It doesn’t there- fore take a genius to work out that unless a large number of new VIP customers are at- tracted to the market in a short time, then Crown Macau will be cannibalising the VIP business of other operators. Faced with this challenge, the other op- erators may be forced to respond in kind or see large sections of their VIP business drain away in short order. If a commission war re- ally does begin, then it could come down to who has the deepest pockets and who is first to blink. Under those circumstances, Las Ve- gas Sands Corp looks in a far better position to bluff things out in Macau than does Mel- co-PBL. LVS already has a cash-generating machine in Sands Macao, and The Venetian Macao has gone a long way towards pay- ing for itself thanks to monetisation of the Grand Canal Shoppes. Melco-PBL has only one functioning property that opened late and over budget, and a large packet of debt and equity to support. Lessons learned Relations between the junkets and operators—particularly the American op- erators—were already strained after the Las Vegas companies learned the hard way that it’s not so easy to bring in Asian high rollers—particularly high rollers from main- land China—without having a deep network of trusted contacts. Close personal relation- ships are the lifeblood of all VIP operations, but in Macau they are absolutely crucial. The Americans may have wished many times—regarding the so-called traditional model of having independent junkets em- bedded within casinos—that Macau hadn’t started from here. But then the territory’s authorities took a decision years ago that at that time casino operators shouldn’t be involved in advancing money to gamblers, and the rest, as they say, is history. VIP Market