Inside Asian Gaming

INSIDE ASIAN GAMING | October 2012 16 Cover Story a 10-year cap on new table games of 3% a year. This kicks in 1st January and permits the market only 165 additional tables in 2013 and 170 in 2014, an average of 28 for each of the six license holders. At least that’s the literal reading, whichno one believes in for the plain fact that it can’t accommodate the six large-scale integrated resorts that are under construction or planned for Cotai between now and 2016- 17, developments representing billions of dollars in capital investment and which the government fully supports since their combined aim is to seal Macau’s status as Asia’s pre-eminent leisure destination. The first of these are Studio City, majority-owned by Melco Crown Entertainment (Nasdaq: MPEL) and comprising more than 130,000 square meters, and a 500,000-square-meter expansion by Galaxy Entertainment Group (0027.HK ) of its Galaxy Macau IR. Plans call for 300-400 table games at Studio City and up to 500 at the Galaxy expansion. Both are scheduled to open in 2015, although the cap allows the entire city only 175 new tables that year. How the political leadership keeps itself busy wriggling out of its own high-minded intentions is a story unto itself. But for the time being, the cap is one of the things that has focused the industry on table games profitability to a greater degree than at any time since the liberalization that opened the market to competition a decade ago. “This is important,” says Union Gaming’s Mr. Govertsen, “as every dollar of mass/ slots GGR is significantly more profitable than VIP.” Calculating Profit As Mr Govertsen suggests, the growth the market is enjoying in mass revenues is likely to prove far more significant than the comparative weakness in present-day gains from VIP. The arithmetic is fairly straightforward. Casinos, like any business, incur costs to produce “sales” (i.e. wagers), mainly in the form of complimentaries—hotel rooms, food and beverage, travel and other giveaways, not to mention labor and fixed costs—and, as you might expect, the cost of the complimentaries is much greater in the VIP rooms, where the casinos also share their win with the junket promoters that bring in the players, extend them credit and operate the VIP rooms. This split has ranged from a contractual 40% to upwards of 55% in some instances and under certain conditions, plus bonuses. It is the major reason why the difference in operating margins (measured after the effective 39% gaming tax is deducted) is huge—an estimated 10% on Casinos, like any business, incur costs to produce “sales” (i.e. wagers), mainly in the form of complimentaries—hotel rooms, food and beverage, travel and other giveaways, not to mention labor and fixed costs—and, as you might expect, the cost of the complimentaries is much greater in the VIP rooms, where the casinos also share their win with the junket promoters that bring in the players. A 60/40 VIP to mass revenue split is not unthinkable as Macau continues to mature around Cotai’s more expansive integrated resort model and becomes gradually more accessible to more Chinese households.