Cap on junket commissions boosts gaming stocks

PUBLISHED : Tuesday, 22 September, 2009, 12:00am
UPDATED : Tuesday, 22 September, 2009, 12:00am

Shares in Macau gaming firms soared yesterday after the government formally implemented a long-anticipated cap on the commissions that casinos in the city pay to their VIP junket agents.

Secretary for Economy and Finance Francis Tam Pak-yuen yesterday issued the order, published in the government gazette, which stipulated commissions be set at 1.25 per cent of VIP gambling chip sales, effective from today.

Questions remain over how the caps will be enforced and implemented and casino operators have been given until October 1 to amend contracts with their junket agents to reflect the change.

Intense competition for business from high rollers in Macau has pushed maximum junket commissions closer to 1.5 per cent of chip sales in recent months, industry insiders have said.

Analysts expect a reduction to 1.25 per cent could offer a significant profitability boost to casinos in the low-margin, high-volume VIP gaming segment.

'An equalisation of commissions partially evens the playing field in Macau,' said Bill Lerner, a Las Vegas-based analyst at independent consultancy Union Gaming Group.

He said that following the commission cap, casinos could be expected to compete for high rollers by taking on more credit risk, either by lending more directly to players or providing junkets more working capital to fund their gambling sessions.

'Otherwise, market share will be more focused than ever on quality of casino product,' he said.

Shares jumped following the announcement. Galaxy Entertainment Group climbed 9.5 per cent to close at HK$3.79, Melco International Development gained 7.7 per cent to HK$5.87 and SJM Holdings rose 5.1 per cent to HK$4.52.

VIP junkets are the middlemen who bring big gamblers to Macau, issue them credit and collect their debts in exchange for a commission paid on either gross VIP chips sales or net casino winnings. High-stakes wagers pushed Macau's gaming revenue to a record high last month, more than tripling monthly casino winnings on the Las Vegas Strip.

VIP gambling accounted for 64 per cent of Macau's 51.43 billion patacas in casino winnings in the first six months of the year.

Caps on junket commissions were first raised by Macau Chief Executive Edmund Ho Hau-wah in April last year as one of a series of measures to control then runaway growth of the gaming industry.

However, the government made no formal move to implement the policy until last month, following high-profile lobbying by a newly formed alliance of the city's six licensed casino operators headed by Stanley Ho Hung-sun.

Playing fair

Casino profitability seen rising in low-margin, high-volume segment

Commissions paid by casinos in Macau to VIP junket agents are now set at: 1.25%

Stacking up

How VIP junket commissions work

For every HK$100 in VIP baccarat chip sales...

Casino expects not win of: $2.85

Casino pays government 39% of net win as tax: $1.11

Casino pays junket agents 1.23% of VIP chip sales as commission: $1.25

Junket pays players a rebate, sometimes as much as 0.9% of VIP chip sales: $0.90

Net win less junket commission less tax, leaves casino with: $0.49