Inside Asian Gaming

INSIDE ASIAN GAMING | December 2009 4 Editorial Publisher Kareem Jalal Director João Costeira Varela Editor Michael Grimes Financial Controller Christina Tan Operations Manager Hilary Lao Contributors Desmond Lam, Steve Karoul I. Nelson Rose, Richard Marcus Shenée Tuck, James J. Hodl Andrew MacDonald William R. Eadington Graphic Designer Brenda Chao Photography Ike Inside Asian Gaming is published by Must Read Publications Ltd Suite 1907, AIA Tower, 215A-301 Av. Comercial de Macau - Macau Tel: (853) 6646 0795 For subscription enquiries, please email subs@asgam.com For advertising enquiries, please email ads@asgam.com or call: (853) 6646 0795 www.asgam.com Inside Asian Gaming is an official media partner of: http://www.gamingstandards.com Michael Grimes We crave your feedback. Please email your comments tomichael@asgam.com One Country, Two VIP Systems With Macau’s gross gaming revenue growing at a rip roaring 59% year on year in November, it’s difficult to see how China can hope to rein in the casino market to track the underlying GDP growth in the Mainland economy, as has been suggested by one respected analyst. In November, the World Bank raised its forecast for China’s GDP growth in 2009 to 8.4%. That’s impressive under current global conditions, but still a long way behind Macau’s casino sector growth. Outside Macau, in China’s domestic consumer and credit markets, the use of macro and microeconomic levers tocontrol growthandaccessby foreigncompanies is a triedandbroadly successfully tested strategy. It makes sense that China would want to try something similar with the Macau casino market. Around 65% of Macau’s gross revenues from games of fortune come from VIP baccarat, and Macau’s VIP baccarat players are thought to come mostly from the Mainland. As Chinese markets go, however, Macau is a very different beast from the rest of the country. This Special Administrative Region of China, celebrating its 10th anniversary this month, has a considerable degree of autonomy on issues such as immigration policy. As a result Macau is much more subject to commercial forces beyond China’s immediate control than are China’s contiguous, purely domestic markets. If Mainland Chinese were the only people visiting Macau casinos, then the curbing of visa issuance under the Individual Visit Scheme (IVS) would do the trick in cooling down GGR growth. They are not. At least 40% of those visiting Macau do so on either a foreign passport or a travel document that is not subject to China’s IVS controls (such as a Hong Kong Permanent Resident identity card). China ultimately has sovereignty over Macau under the ‘One Country Two Systems’ doctrine developed prior to the handover from Portuguese administration in 1999. She’s therefore free to try and restrain the growth of the Macau market through economic levers. The foreign operators who have invested billions of US dollars in infrastructure, and want to achieve payback on that investment as quickly as possible, are under no special obligation to assist in that process. If anything, it’s possible to argue such political constraints create a market incentive for the foreign operators to seek more and more players—and especially high value players—from outside China. There is already some anecdotal evidence that Las Vegas Sands Corp and others are recruiting increasing numbers of VIPs from places such as Japan and the Middle East. One of the great advantages of seeking VIPs from further afield, from the operators’ perspective, is that those players are coming from countries with internationally convertible currencies and with minimal cross-border restrictions on currency movement. This means the casinos can form direct relationships with those players and extend them credit on a one-to-one basis, rather than having to go through betting agents, as is the case with most high rollers from the Chinese Mainland, where the players’ assets are usually in non- convertible renminbi. While it seems unlikely, in the short term at least, that VIPs from outside China could generate the kind of rolling chip volume produced by China’s passionate table gamblers, the more often China tries to use the visa on-off switch, the more focused casino operators under project-payback-pressure are likely be on sourcing VIP clients from outside China. Theoperators don’t needmuchencouragement in this quest. LVS said inanote to investors in June this year that its gross margin on so called‘premium’players (i.e. those receiving credit lines direct from the operator) is 1.0 to 1.5 times higher than for agent-supplied VIP players. Although gambling agents fulfil the very useful function of absorbing credit risk, operators prefer not to share revenues where possible. Presented with a genuine alternative to the volatile supply chain of credit and players from Chinese VIP agents, some operators may be tempted to say“a plague on your house”. The MacauVIPmarket could then potentially metamorphose into two segments. One would predominantly be based on direct players from overseas, offering lower volumes but higher margins. The other would be players from Greater China (the Mainland, Hong Kong and Taiwan) supplied under the traditional format, with betting agents interposing between the players and the casinos, offering higher rolling chip volumes but lower margins. That potential segmentation of the Macau VIP market may seem a little far fetched, but it does illustrate quite clearly the limitations to China’s ability to control the on-off switch to Macau’s vibrant gaming market.