Hong Kong/Macau (Reuters) – U.S. casino owners have placed big bets on Macau, turning the Chinese enclave into the world’s top gaming centre, but local junket operators are forcing big names from Las Vegas to pay top dollar to bring crucial high-roller clients to their tables.
U.S. firms such as Las Vegas Sands, which owns the massive Venetian Macau, have ridden Macau’s boom to counter slowing business back home. But a shock quarterly loss at Sands exposed a truism: size isn’t everything.
„What happened with the Venetian was they tried to maintain a low commission rate because they thought the quality of the property would attract VIP customers,“ said Macquarie gaming analyst Gary Pinge. „However, they underestimated the influence junket operators can have over the VIP players and hence they ended up raising their commission rates.“
Junket operators — tour firms that bring in high-rollers who gamble upward of USD 100,000 a visit — are the gatekeepers who can decide where VIPs open their wallets.
Sands‘ woes highlight how aggressive local firms such as Golden Resorts Group and Neptune Group are squeezing casino margins by demanding higher fees for their services.
Casinos are dependent on junkets, which bankroll mainly Chinese VIP gamblers in return for a fee from the casinos, because of their longstanding relationships with high-rollers, or „whales“.
Restrictions on China’s yuan also work in favor of junket operators. Travelers can take only 20,000 yuan (USD 2,861) out of China on each trip so need help arranging funds to bet about HKD 1 million (USD 128,200) per visit to qualify as a VIP.
Analysts say that unlike in Vegas, it is this VIP segment, not the mass market, that is driving Macau’s growth and will account for roughly 60 percent of gaming revenues this year.
But with no let-up in new casinos opening, existing operators will have to fight even harder for the biggest gamblers.
„They must get ready for the avalanche of new tables planned for 2009. This will put further pressures on new and existing casinos,“ said Ryan Tsang, senior director at Standard & Poor’s.
Stuck in an Glut
New casinos have already cut into market share gains and squeezed daily revenue per table to below USD 12,000 from USD 22,000 in 2002.
At the Venetian, where gondoliers serenade tourists as they float down a canal under a make-believe sky, a decision to pay a smaller commission sent VIP chip revenues plunging 23 percent in the first quarter, resulting in a net loss of USD 11.2 million.
„Last night there were very few people here. Almost all the tables were empty,“ Vineet Tibrewala, a visiting Indian businessman, said on a recent weekday at the casino. „If you’ve been to Vegas two or three times, you would hardly be impressed.“
In the short term, the supply glut will go on. More than a dozen operators are building on the Cotai Strip — 4 sq km (1.5 sq miles) of reclaimed land — with most due to open in 2009-10.
Casinos are also facing other challenges including a shortage of labor, poor infrastructure and social unrest over corruption and a widening income gap, but the industry has been a massive boost to the local economy.
Macau sowed the seeds of the boom in 2002 by scrapping the monopoly of local mogul Stanley Ho and welcoming Sheldon Adelson, the force behind Sands, and Steve Wynn, whose Wynn Resorts has built a signature obsidian glass hotel-casino.
Another U.S. rival, MGM Mirage Inc, opened the USD 1.25 billion MGM Grand Macau in December, while Asian firms Galaxy Entertainment and Melco PBL Entertainment, a venture between Melco International and Australia’s Publishing & Broadcasting Ltd PBL.AX, joined the fray in 2008.
Gaming revenues in the former Portuguese enclave overtook the Las Vegas Strip in 2006 and ballooned 47 percent to $ 10.6 billion last year, while revenues at U.S. commercial casinos rose only 5.3 percent. And revenue at Macau’s 29 casinos grew a further 63 percent year-on-year in the three months to March.
For the nimble, the rewards are there. Melco’s Crown, once derided by analysts for its awkward location on Taipa island, struck gold when it signed a deal with VIP junket consolidator A-Max. Its VIP market share of 6.6 percent in November leapt to 24.8 percent in February and fourth-quarter revenue of USD 180 million soared to USD 483 million in the first quarter.
Goldman Sachs analysts say Wynn’s boutique format was key to driving its Macau earnings up 64 percent to USD 129 million in the first quarter, but it may struggle to stay ahead as competition hots up. Galaxy, which Citigroup says has the weakest VIP offering, plans a jumbo VIP space at its Starworld casino with an exclusive junket operator, most likely Neptune, analysts say.
Gaming now accounts for about 60 percent of Macau’s gross domestic product, which has tripled since it returned to Chinese rule in 1999, but casinos will not keep mushrooming forever.
Fears about oversupply and a public outcry over corruption prompted Macau Chief Executive Edmund Ho, acting on orders from Beijing, to freeze gaming licenses and land allocations for new casinos.
The government also said it would try to regulate VIP commissions. Experts say the likes of Neptune, Golden, A-Max Holdings and Dore Holdings are set to hike their fees from below 1 percent to as much as 1.35 percent by end-2008.
Macau hopes the new restrictions will encourage more non-gaming activities, which make up just 20 percent of revenue for casinos in Macau, against 60 percent in Las Vegas.
„The Macau Government has an extensive range of infrastructure projects underway that will help drive the continuing growth and success of Macau,“ said Galaxy’s CFO Robert Drake, who declined to discuss VIP clients and junkets in response to questions emailed by Reuters.