Battle for high rollers to hit casino margins
Macau casino operators have kicked off the year with a price war and the most likely loser in a battle for share in the high rollers' market will be profit margins.
Official market data will not be available until later next month and most operators will report results in the weeks following that, but analysts' estimates suggest the distribution of VIP gaming market share among Macau's six licensed gaming firms has seen a massive shake-up in the first two months of the year.
Between November and last month, the overall market share of Stanley Ho Hung-sun's Sociedade de Jogos de Macau (SJM) fell from 37 per cent to 24 per cent, according to Credit Suisse analyst Gabriel Chan.
Market shares fell at Venetian Macao owner Las Vegas Sands Corp from 28 per cent to 22 per cent and at Galaxy Entertainment from 15 per cent to below 11 per cent.
The declines were due in part to the opening in December of the US$1.25 billion MGM Grand Macau, a joint venture between Mr Ho's daughter Pansy Ho Chiu-king and Las Vegas-based MGM Mirage, that claimed 8 per cent of the market by last month.
But a bigger factor has been the dramatic inroads made by Melco PBL Entertainment, a joint venture between Mr Ho's son Lawrence Ho Yau-lung and Australian James Packer's Crown Ltd (formerly Publishing and Broadcasting Ltd).
Melco PBL's Crown Macau, which struggled since opening in May of last year, appears to have finally pulled a winning hand via a VIP gaming partnership with a unit of locally listed junket investor A-Max Holdings. Since the tie-up launched in December, Crown Macau's market share has surged from about 6 per cent to 18 per cent last month, said Mr Chan, who reckons the property is now 'the busiest casino in the world in terms of betting volume'.
Melco PBL managed its dramatic market share increase by agreeing to pay up to 1.35 per cent of VIP gambling chip sales to the A-Max unit, which has in turn subcontracted about 8 VIP junket agents to deliver high rollers to the casino, lend them money, and collect their gambling debts. Previously, Macau casino operators paid an average junket commission of about 1.2 per cent, analysts said.
The move amounted to the first shot in what appears to have snowballed into a small-scale commission war that is expected to keep margins under pressure.
Las Vegas Sands last month raised commission payments for junkets by about 10 per cent, to an average of 1.22 per cent of chip sales, compared with a base of 1.1 per cent offered previously at the Venetian. In place of a straight commission on chip sales, the company also switched junkets to a revenue-sharing model.
Galaxy Entertainment's StarWorld property also raised commissions to 1.25 per cent, said Mr Chan. In addition, it began offering limited credit to VIP junket room operators to help them bankroll high rollers' gambling sessions.
Other operators would not comment on their payment levels, but rising commissions are expected to shave several percentage points off the margins that most operators had enjoyed in VIP gaming.
Deutsche Bank analyst Bill Lerner forecasts Crown Macau, which relies almost entirely on VIP business, will book a 13.4 per cent margin on earnings before interest, tax, depreciation and amortisation this year.
That compares with 23 per cent to 25 per cent fourth-quarter ebitda margins at the Sands, Venetian and Wynn resorts, which are also buoyed by contributions from lower-volume but higher-margin mass-market business.
'It is clear junket operators have much higher bargaining power than casino operators,' Mr Chan said.
