Inside Asian Gaming

INSIDE ASIAN GAMING | August 2008 8 40% gaming tax. Despite its impressive casino revenue, Macau’s intensifying junket commission war combined with the steep tax rate means its casinos are operating at barely sustainable margins in the VIP sector. The Macau government recently capped the commission rate on sales of rolling chips at 1.25% in order to rein in the cutthroat competition. Assuming an ambitious 3% house win percentage on VIP baccarat (as many Macau operators do, even though the theoretical win is 2.52%), this means that after gaming tax and commissions are deducted, Macau casinos are left with only about 18% of their recorded VIP baccarat revenue to cover their operating costs and contribute to profit. If Jeju casinos offered the same commission rate, they would keep 48%. Conversely, Jeju’s lower gaming tax allows its casinos to offer junket commissions up to 2.15% and still achieve the same margin Macau casinos would have at a 1.25% commission rate. This provides a clear incentive for junket operators to take their customers to Jeju rather than Macau. Owing to restrictions on taking money out of China, mainland Chinese high-rollers rely on junkets to extend credit to them wherever they gamble. T.H.E. Hotel & LVegas Casino CEO Geoff McDowell explains that while junket operators drive the property’s high-endChinesebusiness,“we’re takingcare of our Japanese customers directly.” Rather than commissions,Japanese high-rollers,like their western counterparts, are offered loss discounts in addition to the usual comps, such as flights and accommodation. Mr McDowell claims Macau is “too dependent on VIP operators and the Chinese market.” As for speculation that South Korea’s casino industry could be decimated should Japan legalise casinos, Mr Park and Mr McDowell are quietly confident such a decision is further off on the horizon than most observers believe, given opposition from the powerful pachinko industry, women’s groups, and politicians wanting to win housewives’ votes. Domestic demand The Philippines is currently the leading destination for South Koreans seeking to gamble outside their home country, followed by Macau and the US. A trip to the Philippines apparently arouses less suspicion among South Korean tax authorities on the lookout for citizens under-reporting income than a trip to Macau, which is known as a gambling destination. Within South Korea, Kangwon Land, located in the isolated and impoverished province of Kangwon, holds an exclusive license to provide casino gaming to locals until 2012. Messrs Park and McDowell believe the government could issue further casino licenses to serve the domestic market after 2012, with Jeju a likely location for the new licensees to operate since the island can only be reached by air or sea from the mainland. This means access to Jeju can be easily monitored and controlled, allowing the government to enforce restrictions designed to protect its citizens (for example, locals are only allowed to visit Kangwon Land three times a month). By the time further domestic casino licenses are issued, Gillmann Investment Asia will have established a solid track record providing high-end gaming and integrated resort offerings on Jeju, making the company well positioned to secure one of those licenses. Gillmann Investment Asia plans to open a 2,000-room mega resort on Jeju by 2010, and is currently negotiating the land purchase with local authorities. Cover Story The LVegas Casino