Inside Asian Gaming

INSIDE ASIAN GAMING | November 2011 8 Cover Story demand. Macau casino stocks plunged in Hong Kong—outpacing a 4.4% decline in the Hang Seng—reportedly on increasing fears tighter credit will cut off the funds of wealthy gamblers. Thursday 20th October : Some of the financial media reported that Wynn Resorts missed its third quarter earnings target— though a number of analysts argued that if the hold rate on baccarat in Macau was normalised, the earnings were actually in- line with projections. Macau gaming shares moved downward on the news. There was also some evidence in October of a positive correlation between good microeconomic news out of Macau and an upward movement in Macau gaming stocks. Thursday 6th October : The Macau government said gaming revenues grew 39% year-on-year in September. Macau- related gaming stocks all moved higher. But as November began, there appeared to be a breakdown in the correlation between good microeconomic news from Macau and Macau gaming prices. Tuesday 1st November : Macau’s Gaming Inspection and Coordination Bureau said GGR grew 42% year-on-year in October to MOP26.9 billion (US$3.4 billion). But Macau casino investors continued to sell off, in tandem with other high-beta, potentially recession-vulnerable names. On the day, LVS was down 3.3%, MGMwas down 7.2%, Wynn fell 5.5% and MPEL dropped 9.1%. It’s too early to say whether this lack of positive correlation between good Macau revenue numbers and Macau gaming share prices is a trend. But itwill beof some concern to the industry. It also raises the question of whether thereare issues—other than the fact that investors may perceive a strong positive beta value between China’s macroeconomic growth and Macau gaming—that make investors nervous about Macau gaming stocks. It’s certainly true that aside from the headline revenue numbers, it’s not easy to get detailed background information on the mechanics and performance of Macau’s VIP baccarat market. That information is in the hands and heads of a very small number of people. When you invest in a Macau gaming name you have very little background information on how roughly three quarters of the gross revenues of that stock are actually being generated. The junkets don’t tend to share much information with the market because their core business—cross- border currency transfer—is a grey area in China. Those junkets that have opened themselves up to media scrutiny have sometimes been rewardedby luridheadlines about triads. The relationship between the foreign-owned casino operators and the junkets is sensitive. The Western operators aren’t allowed by their home regulators to have a casino within their casino. But some of them do have the same junket partners that got Stanley Ho blacklisted when he went shopping for foreign casino licences. This sensitivity means operators rarely go into much detail about their junket partners in their management analysis. The suggestion made to IAG is that currently most junkets are working on a profit share model with the Macau operators (also known as revenue share)—with up to 47% of house net win offered to the junket by the most aggressive operator, another 40% going to the government in the form of gaming tax, and the remainder retained by the operator. IAG understands from industry insiders that the big junket consolidators with access to many players and high volumes of roll are all operating profit/ revenue share, while the smaller junkets and sub-junkets with smaller numbers of players and lower volumes of roll are all operating on the traditional rolling chip commission model, capped at 1.25%. The profit/revenue share model is more attractive to thecasinosbecause it frees them of a fixed cost (i.e. rolling chip commission) that doesn’t vary even when the house win rate varies. Although on the face of it profit share looks like a worse deal for the junkets than the rolling chip commission model, it arguably strengthens themarket partnership between junket and casino, and reduces the impact of potential competition from existing and planned casino jurisdictions that have lower tax rates. Credit pullback One persistent rumour—that might speak to the issue of why investors continued to sell off even with the good October gaming revenue numbers out of Macau— is that a major Macau junket has halved its credit issuance in recent weeks. Even if this were true, no-one seems to be able to offer clarity on whether it’s a function of responsible forwardmanagement of risk by a junket operator inuncertainmacroeconomic times, or whether it’s a reactive response to non-performance on existing player loans. The two are very different things. Evenassumingforamomentthatajunket operator had reduced its debt exposure in response to some non-performing loans, any attempt to extrapolate a trend from a single data point or tiny number of data points (e.g. using individual cases ofVIP bad debt among the billions of Hong Kong dollars rolled in the VIP rooms every quarter to create a theory or model for the whole market) looks at best like poor statistical analysis and at worst like an attempt to ‘massage’ opinion regarding Opaque—is the Macau VIP glass really full?