Macaus crisis of confidence - Thursday 1st of May 2008

The stemming of casino development as announced by the chief executive Edmund Ho Hau Wah this week is in response to a number of concerning trends which also worry investors, according to an eight page analysis by a gaming management portal.

A possible credit bubble, rising costs, infrastructure and labour constraints, and gaming-centric visitors have all combined to concern investment analysts recently said the urbino.net paper titled Macau – confidence or crisis.

The recent escalation in the costs of attracting high-roller players - which account for approximately 70 percent of Macaus gaming revenue – have resulted in margins being “significantly eroded” and competition “dramatically” increasing, according to the report.

The introduction of junket consolidators has recently shaken the industry. In December last year Melco PBL Entertainment (Macau) Limited began an arrangement with Hong Kong stock exchange listed A-MAX Holdings Ltd. In return for a commission as high as 1.35 percent of monthly rolling chip turnover – reportedly reducing Melcos Crown Macau margins by half – the company provides credit to a number of smaller junket agents.

“The consolidators, as a result, gain considerably greater bargaining power relative to the concessionaires in delivering their players through their network of junket operators,” the report said.

Other casino operators such as Wynn and Las Vegas Sands Corporation have followed, “engaging in the price war on commissions, while still suggesting that they do not have to pay premium prices for commissions due to their size, brand power, and quality of facilities,” according to urbino.net.

MGM Grand Macau has decided to avoid wading into the highly competitive VIP market and is concentrating on the mass market, the report said.

Crowns take

The rates will not be able to climb much higher, the portal suggests, with casinos losing money if commission moves into the 1.42 percent to 1.62 percent of chip sales range due to the slim advantage the house enjoys from VIP baccarat.

From the February 2008 rolling-chip turnover at Crown Macau of 42.4 billion patacas, the house would have theoretically earned approximately 112 million patacas, according to the reports calculations.

The analysis also suggests SJM has increased commission levels leaving it with 5 percent of gross revenue after taxes.

“It is not hard to see how some operations, either through lack of volume, bad luck in the volatility arena, or an inability to come to survival terms with junket aggregators, may indeed fall by the wayside in the competitive Macau marketplace,” the report concludes.

Credit bubble?

In turn, the increased pressure junket operators are under to reach higher commission targets may be creating a “credit bubble” in VIP rooms. The present arrangement that sees casino operators “insulated” from the credit risk may alter under market pressures to fuel growth, the report suggests.

“Pressure may be exerted on some concessionaires to extend credit to junket operators or even consolidators to continue to fuel the growth in volume at the baccarat tables,” reports urbino.net.

“Thus, while credit risk for concessionaires seems to be relatively insignificant at present, the prospect of a shift in credit risk from junket operators to concessionaires could result in increased bad and doubtful debt coming onto the concessionaires books.”

Liquidity from the Hong Kong stock exchange has also allowed junket aggregators to “be more liberal with their credit” and extend “their balance sheet assets” to sub-agents, the report states. In turn this has led to the sub-agents offering “credit with less rigourous principles governing their lending decisions”, it states.

Beijing

Last week Mr Ho said the decision to curb future casino development in the SAR was in line with the wishes of Beijing. The urbino.net article suggests the mainland has so far overseen development in Macau with a “light touch” with the aim of showing the world and particularly Taiwan that the one country, two system approach works. As other Asian countries have been impressed with Macaus expansion, the mainland government may also be considering opening up deprived parts of its country in the North or near Shanghai to the economic benefits of gambling, the report said.

In addition Beijing is “undoubtedly” concerned with social costs of an increased presence of casinos in its society, particularly in the areas of “political corruption, the fall-out from excessive gambling and loan shark activities”, it reports.

“Macau might end up being seen by mainland China as a net importer of economic benefits for itself but an exporter of social costs to the rest of China.”

Local workers

The policy of reserving casino floor jobs for local workers has relegated Macau citizens to base- level dealing jobs within the casino sector, urbino.net argues, as opportunities for promotion are prohibited as workers can not be replaced with non-Macau citizens.

The protectionist policy has also increased labour costs for operators and may be luring the local youth away from schools and universities to work at casinos, the report states.

A solution of higher wages for Macau citizens compared with imported labour may result or a quota system allowing a certain number of foreign workers onto the gaming floor, the report suggests.

“The need to permit more foreign workers into Macau is already an issue whose importance can only increase in the next several years,” the report concluded.

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