Inside Asian Gaming

INSIDE ASIAN GAMING | February 2011 10 concessionaires still have to pay the near 40% tax on the credit- fuelled gross originally wagered (an early bone of contention with Steve Wynn when he entered the market). In Nevada, operators don’t pay tax on uncollectible player debts. To offset that potential loss of tax revenue to the public purse, the D.A.’s Bad Check Unit is allowed to retain 5% of any monies recovered from successful debt recovery to cover departmental and county costs. That compares favourably with the 20% fee charged by many commercial debt recovery companies. Union Gaming Research says that bad debt expense on the Las Vegas Strip in financial year 2009 (the most recently available data) was about 3.3% of gross gaming revenue (GGR). In 2009, the Strip’s gaming revenues were US$5.5 billion, meaning bad debt amounted to about US$181 million. On those metrics (notwithstanding the fact 2009 was adversely affected on the revenue and debt sides by the economic downturn), Chinese gamblers could be responsible for nearly half of the Las Vegas Strip’s annual gambling-related bad debt. There is some anecdotal evidence that debt default rates may be historically higher in Macau than on the Las Vegas Strip. Back in 2005, Jorge Oliveira, then commissioner for legal affairs in the Macau Gaming Commission, suggested a Macau system for write offs capped at the equivalent of 6% of annual GGR. That figure may have been an estimated one rather than one scientifically researched, but it’s interesting to note that over the past 20 years, bad debt on the Las Vegas Strip has averaged only 3.1% of GGR annually, according to figures collated by Union Gaming Research. While recent reports of a small outbreak of VIP bad debt may be limited to a tiny number of players and may be only a fraction of 1% of total Macau VIP revenue, it does illustrate one potential market risk involved in reliance on the high rollers. That reliance may eventually change largely as a function of the expected growth of the Chinese middle class. Those ‘non-comped’ middle- income mass-market players may be more inclined to divert some of their cash to goods and services such as shopping, restaurants and hotels, so that Macau becomes the multi-night tourism destination it aspires to be. And that brings us to the January revenue numbers. The sell offs seen in Las Vegas Sands Corp’s stock on 7th February after reopening of Asian markets post-Lunar New Year holiday may be as much a function of profit taking (in a region with a lot of retail- level investors that see the New Year as an auspicious moment in the business cycle) as it was global market disappointment in LVS’s fourth quarter 2010 revenue (as suggested in sections of the financial press). Looking at LVS’s Macau metrics for January, the company has the highest exposure of all the concessionaires to the mass market (where market-wide, gross margins can be 35%) and the least reliance on the VIP segment (where volumes are huge but market-wide margins are typically 7% to as little as 3%). That above market average contribution from the mass segment can only be good news in terms of return on invested capital in Galaxy’s overall dependence on high roller play is also likely to reduce significantly when the predominantly mass-market Galaxy Macau resort opens on Macau later this year. Macau Revenue