Designated “VIP” to sidestep smoking rules
VIP growth in Macau’s casino industry may have been partly the result of table reclassification, a strategy used by some operators to get around the smoking ban.
According to GGRAsia, the city’s gaming regulator defines a VIP room based not on its rolling chip program but on the number of tables and the room’s location off the main floor. Smoking has long been banned at mass-market tables and slots, but will be permitted at VIP tables until January 2019. Accordingly, some operators designated premium-mass areas as VIP so customers could continue to light up.
Gross gaming revenue in the VIP segment grew 16.8 percent in the first quarter on a year-on-year basis, according to a report released in April by the Gaming Inspection and Coordination Bureau or DICJ; the latest figures show that VIP baccarat rose 34.8 percent in the second quarter.
“We believe the year-on-year comparisons for VIP and mass were probably affected by table reclassifications, which in the first quarter resulted in DICJ-reported VIP revenue growth that was 800 basis points higher than what the operators reported,” according to Nomura. “If the first quarter’s reporting differential is repeated, then the mix reported by companies in the second quarter will be 12 percent mass and 27 percent VIP, which is still likely skewed too high for the government’s taste.”
The brokerage “cautions investors that a significantly higher mix of VIP versus mass revenues is an unwelcome combination. We do not believe Beijing has changed its view on either corruption or the illicit movement of renminbi from the mainland.”
Nomura is not the only one sounding a note of caution. Macau junket investor Suncity Group has also advised agents and Mainland China customers to be prudent about bringing money across the border.
The revenue picture should be clearer once tableside smoking in VIP areas is completely phased out by January 1, 2019. The new rules against smoking in VIP rooms take effect January 1, 2018, but the government has given operators an additional 12 months to set up VIP smoking lounges.
“While the smoking ban is likely to serve as a headwind to GGR (namely VIP and premium mass), we believe it will level the playing field across all operators and provide a clear view of segment gaming trends,” said Deutsche Bank analysts Carlo Santarelli and Danny Valoy.
They too said recent GGR figures have been skewed by table reclassification. “Since the fourth quarter of 2014, when the smoking ban in mass gaming areas went into effect, the DICJ data has been muddied by reclassifications and we believe investors have often been provided with misleading segment-by-segment trends. In the first quarter of 2017 alone, roughly US$700 million of mass revenue was reclassified as VIP revenue for DICJ reporting purposes.
“The vast majority of this amount relates to reclassified smoking ‘VIP’ tables at City of Dreams and Galaxy Cotai,” they added. “We believe, come January of 2019, this approximately US$2.8-billion annual run-rate mass revenue stream is up for grabs and represents a meaningful revenue share opportunity for the other participants on Cotai,” said the analysts.
Angela Leong, an executive director of Macau gaming operator SJM Holdings Ltd. and a city lawmaker, expressed special concern for satellite casinos, which might have a harder time reconfiguring their floors to include smoking lounges.
“We hope that the government can establish an inter-secretary task group that can help these older satellite casinos,” Leong said. “They have been contributing to Macau’s tax revenue, peace and prosperity for many years. We hope that they can be treated fairly.
“Can it all be done in only one year?” she asked. “The government should publish the standards quickly so that the casinos would not make mistakes in their restructuring process.”
Elsewhere in Macau, the president of the Association of Gaming & Entertainment Promoters of Macau, Kwok Chi Chung, has asked the government to tighten requirements for junket promoters, the Macau Daily Times reports. Junket runners currently need only to provide a total of MOP100,000 (US$12,400) in deposits to attain the status of junket promoter. Kwok however insisted that “MOP100,000 for doing businesses in the order of billions is, of course, too low.”
Kwok, formerly with the city’s Judiciary Police, told GGRAsia, “For many junket promoters here, the business scale that we’re talking of is a multibillion [pataca] rolling chip turnover per month. To match that scale, I think the capital requirement can be as high as MOP50 million (US$6.2 million).”
He said his organization has met with DICJ head Paulo Martins Chan “and told him our thoughts on the various issues regarding junket regulation, including the capital threshold. But so far we didn’t hear any conclusive feedback from him in respect to what the revised law regulating junkets looks like.”
