Inside Asian Gaming

October 2012 | INSIDE ASIAN GAMING 17 Cover Story VIPs compared with up to 40% on mass- market gamblers, who spend a lot less but come in on their own, deal with the casinos directly and wager in cash. On $100 of gaming revenue, the 72% generated by VIP play at the end of 2011 delivered a theoretical $7.2 in EBITDA (earningsbeforeinterest,taxes,depreciation and amortization), the acceptedmeasure of a casino’s effectiveness in turning revenue into net income. The remaining $28 in mass play (comprised of 26% tables, 4% machine games) at a 40% margin delivers EBITDA of up to $11.2. Combined, that’s $18.2 in EBITDA. By the third quarter of 2012, the percentage share of VIP tomass had reverted to a more historical 68/32, suggesting the industry derived $19.6 in EBITDA ($6.8 VIP and $12.8 mass) from every $100 in gaming revenue. As mass market growth continues tooutstripVIPgrowth—the former increased 29% year on year in 3Q 2012 while the latter declined 1%—casinos’ EBITDA margins will improve further. 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 through improved rail, light rail, road and sea and air transport, the ongoing development of neighboring Hengqin Island as a supporting hub of commercial, residential and leisure development, and Beijing continues to ease historic travel restrictions. Mass play “will likely make up an increasingly larger portion of the market as the next wave of supply growth starts to come on line in 2015-2016,” Fitch Ratings Agency says. “The mix continues to shift from low- operating-leverage and low-margin VIP to high-operating-leverage and high- margin mass segment,” Kenneth Fong, vice president of Asia Pacific Equity Research for J.P. Morgan, wrote in a May note to investors. Of course, it’s not the analysts alone who have thought this through. That’s why ETGs are becoming an increasing presence on the city’s casino floors, both as “a near-term workaround with respect to the table cap,” says Mr Govertsen, “and as the preferred method of gaming directed at the lower- end,” with the added virtue of lower labor costs. He estimates their numbers at more than 3,500 citywide. The 280 deployed at the Sands Cotai Central opening in September include the market’s largest “stadium”-style installation to date. It’s a configuration structured around a live dealer and targeting players with a bit more wallet (HK$100 minimums. Union Gaming says the market could see 2,000 more ETG seats by 2017. It’s also a technology that speaks to the increasing sophistication being applied to table yield management as operators get better at keying on individuals within the mass of the mass and tailor their marketing and product offers accordingly. These include the HK$500-$1,000 bettor, a “high- limit” $1,000-$2,000 player, and perhaps the most profitable segment in the market, the so-called “premium mass” players, broadly characterized by their $5,000 minimums. As MGM China’s Grant Bowie explains it, “What we’re all trying to do is get the range between the top-performing and lowest- performing tables closer together.” It’s a process that will prove much more important to the industry going forward than trying to gauge how the mainland’s super-rich are feeling about life, an exercise of dubious value at best. The future of the “individual visit scheme,” which Beijing instituted a decade ago to regulate the outbound travel of its citizens, looms far larger. Intended initially to boost the fortunes of Hong Kong, which was reeling at the time from fears surrounding the SARS epidemic, the IVS has been expanded over the years to 49 cities and has evolved into the preferred method of entry into Macau from the mainland and the conduit of the most lucrative cash players, most of whom currently hail from populous Guangdong Province, which envelops the city’s northern and western frontiers. A multiple-entry visa is reported to be under consideration for residents of neighboring Zhuhai, which could be years away. But in the meantime, travel under the IVS continues to grow, and the central government continues to take a favorable view of its impacts. On 1st September a new visa policy was implemented for non- native residents working or studying in the nation’s six largest cities: Beijing, Tianjin, Shanghai, Chongqing, Guangzhou and Shenzhen. It allows them to apply locally under the IVS for travel to Macau and Hong Kong. Union Gaming estimates that at least 8 million people will be immediately eligible under the plan. Writing at the time the policy was announced, Mr Fong said, “With the continuing infrastructure improvements that connect Macau to the rest of China, and a more supportive visa policy gradually introduced going forward, we continue to see strong growth potential in the mass- market segment.” “What we’re all trying to do is get the range between the top-performing and lowest- performing tables closer together.” — Grant Bowie, CEO, MGM China Holdings