Inside Asian Gaming

January 2009 | INSIDE ASIAN GAMING 17 In Focus So there we have it from the horse’s mouth. A ‘volatility hedge arrangement’ with a junket consolidator is only the second best way for a casino operator to mitigate volatility risk in high stakes baccarat. It will have to do for the time being though. Maintaining high volume of play to create a smoothing effect in liquidity doesn’t look such an easy option when the Macau government has effectively outlawed a price war on VIP commission. It was, after all, the headline-grabbing offer of 1.35%rolling chip commission that helped Crown Macau grab around 18% of Macau’s entire VIP baccarat business by the end of the first quarter of 2008. Maintaining or building VIP play volume is also going to be tough at a time of global recession and when visa restrictions are still in place for visitors from China. During the Q1 2008 earnings call, Mr Dewhurst went into more detail about MPEL’s hedging arrangements with AMA. “We’ve also always offered a revenue shared base junket compensation model, which shares the impact of table hold variation between the casino and the junket operators,” explained Mr Dewhurst. “Some of the tables allocated to AMA have recently been included in this programme,” he added. “Last we have constructed a win rate sharing arrangement that allows us to smooth the peaks, and [that] rallies the table hold within our commission based junket business with AMA. All this is designed to make our cash flows and earnings more stable and predictable.” This is all good stuff, but a fourth point worth making is that MPEL and A-Max are a lot closer than is typically the case in a conventionalcustomer-supplierrelationship. Ted Chan, the current President of Crown Macau, was until November 2008 CEO of A-Max Holdings. And before joining A-Max, which started trading in December 2007, Mr Chan was head of Mocha Clubs, the Macau slot club unit of MPEL. There is nothing illegal about all of this, and Inside Asian Gaming and its publishers wouldliketopointoutwemakenosuggestion of impropriety in the arrangement. This closeness between customer and supplier does, though, arguably make it harder for investors to assess the effectiveness ofMPEL’s VIP gaming business model as set against its competitors, and to judge how transparently the volatility hedge arrangement will be implemented. One thing seems clear. Table hold volatility will remain a topic of intense interest for all operators as long as Macau remains a baccarat focused market. Global recession, regional economic slow down and a mini-credit crunch among Chinese high rollers may all work to make it harder for those operators to smooth the effects of this volatility on behalf of their investors, but it won’t stop them from trying. After all, many of them are likely to have searching questions posed by analysts on the hunt for upside in what’s likely to be a challenging 2009.