Macau Gambling On Commission Cap

Gaming analysts believe the long-awaited cap on junket commission payments in Macau could have some negative impact on growth projections for the world’s largest casino market.
The idea of a mandatory cap on commission paid to Macau junket operators was first floated last summer but has yet to be introduced despite government backing and an apparent consensus among the Chinese SAR’s six casino concessionaires in favour of the limit.

Observers suggest that any officially-mandated cap may now have to wait until after a new Macau chief executive takes office later this year, while any voluntary agreement on junket commission’s could prove itself to be a fragile consensus, according to Andrew Zarnett, gaming and lodging high-yield debt analyst with Deutsche Bank.

“I think they’ll try,” Zarnett said of a voluntary agreement to restrict junket commissions. “But then every once in a while one of [the operators] will stray outside the circle, then others will follow, and then they’ll come back together,” he told a keynote panel held as part of last week’s G2E Asia conference at the Venetian Macau resort.

Logic would suggest that the mooted 1.25 percent commission cap could collectively benefit the Macau operators as it would shore up the casinos’ VIP margins, and also act to defuse any further talk of the ‘commission war’ that was sparked last year after Melco Crown agreed to pay junket operator Amax Holdings an unprecedented commission of 1.35 percent of all high-rolling VIP gaming spend brought in by Amax.

Speaking on the G2E analysts’ panel, Gary Pinge of Macquarie Securities agreed that a commission cap would generally be a good thing for the casino operators, but he warned that it may also have some impact on revenue returns over the longer-term.

“The challenge will be convincing the junkets of the reasoning [behind the cap],” Pinge said, adding there was a risk that junkets could “act like banks” and simply reduce the amount of credit they extend to VIP customers in the wake of a 1.25 percent commission limit. “We’ll probably see some ramifications on gaming revenue,” he said. “It won’t all be positive and you’ll probably have some fallback on projected revenue growth as a result.”

According to the analysts, the junkets’ continuing hold on the Macau market can be illustrated by the fact that most of the revenue decline of recent months is accounted for by lower VIP spend rather than any significant drop-off in the mass-market, where gamblers are not typically afforded credit by the junket operators.

Pinge suggested that the continuing robustness of the mass-market also indicates that it was more likely the reluctance of junkets to extend gambling credit to high-rolling mainland Chinese gamblers amid economically-uncertain times that caused the recent slump in gaming revenues in Macau, rather than a knock-on effect of the tightening by Beijing of visa restrictions on individual travel to the SAR.

But away from the impact of any junket or visa restrictions, the analysts gathered at G2E agreed that Macau’s casino sector is still far more likely to recover from its recent downturn in fortunes quicker than the more ‘cyclical’ Las Vegas market.

Like Macau, the Vegas market has been suffering under the twin pressure from falling revenues and from its debt-heavy casino operators bearing the full brunt of the credit crunch and the subsequent slowdown in capital markets.

But the gaming operators in question may find it easier to raise capital for further expansion in Macau or elsewhere in Asia than they will in a US market where further new supply is already due to be added both regionally and in Vegas with the opening of the Wynn Encore resort and MGM’s CityCenter property.

Adam Rosenburg, head of Goldman Sachs’ global gaming division, said that Las Vegas had now entered an era where the casino sector will find itself increasingly dependent on “cyclical” swings in demand. The Asian sector, on the other hand, represents a “more compelling case” for new investment, Rosenburg suggested.

“Absorption in Las Vegas will continue to have a very difficult time into 2010 as new supply gets added to the market,” agreed Deutsche Bank’s Zarnett.

According to Zarnett, should new casino openings in Macau and Singapore underline the case for still-unsatisfied demand for high-level gaming resorts in Asia, then operators may find financing expansion projects easier than they would in the US – though perhaps not on the same terms as they would have done several years ago.

“If the fundamentals in Macau and Singapore point to demand in the market then financing will be there to a degree, but the parameters have changed,” Zarnett said.

Source: Gambling Compliance Ltd

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