Feb. 24 (Bloomberg) -- Macau’s gambling riches sparked bloody gunfights between triad gangsters two decades ago. Today, there’s a new conflict brewing, only this time it’s being waged with private jets, limousines and million-dollar loans.
The latest battle pits casinos against their long-time allies, so-called junket operators that for years have recruited rich gamblers from China, whisked them to Macau and given them interest-free loans to circumvent limits on cash they can take out of the mainland. Now companies such as Sheldon Adelson’s Sands China Ltd. offer the same services, aiming to cut out the middlemen. At stake are profits from the world’s biggest gambling market with $45.2 billion in revenue last year -- almost seven times the size of the Las Vegas Strip.
“Direct VIPs give us considerably higher profit margins,” MGM China Holdings Ltd. Chief Executive Officer Grant Bowie said over coffee at the Rossio restaurant near the company’s 25,000-square-meter (269,000-square-foot) gaming floor.
A casino can make 10 percent to 15 percent more off big-time Chinese players if it hosts them itself, instead of paying junkets to do the same job in exclusive VIP rooms it leases to them, according to Karen Tang, an analyst at Deutsche Bank AG in Hong Kong. Others put the potential at as much as 50 percent more. Either way, the casinos going it on their own could be a revolution for the world’s richest gambling hub.
Junket operators, led by Suncity Group and Jimei Group, have a steady grip on the industry. Still, some are feeling the pressure. “We are being squeezed,” said Yu Yio Hung, who operates a single VIP room at Altira casino.
Suncity and Jimei, as well as Sands China, Galaxy Entertainment Group Ltd. and Wynn Macau Ltd., declined to comment for this article.
MGM China dropped 1.2 percent to close at HK$32.25 in Hong Kong trading. SJM Holdings Ltd. dropped 1.2 percent, Galaxy slid 0.5 percent while Melco Crown Entertainment Ltd. fell 0.2 percent. Sands China rose 0.8 percent. The city’s benchmark Hang Seng Index fell 0.8 percent.
VIPs account for about two-thirds of Macau’s casino revenue. The majority of them are mainland Chinese who bet on credit because of the country’s cash regulations. The laws restrict to 20,000 yuan ($3,300) the amount a citizen may take across the border, and a maximum of 10,000 yuan from a cash machine in a day.
That’s not enough for a VIP, who by the industry’s definition bets at least $1 million during every visit to the enclave, the only place in China where casinos are legal. So most big spenders from the mainland play with chips loaned to them, at no interest.
They flock to private clubs like Sky 33 in Galaxy Entertainment’s casino, where anybody who doesn’t wager at least 5 million yuan isn’t welcome, or Sky 32, which has a waterfall and a 10 million yuan minimum. The junkets that bring most of them in scout for patrons across China, and then arrange transportation, hotels and a line of credit.
The system made sense when Macau opened up its gaming market in 2002, granting permits to five new operators -- Sands China, MGM China, Galaxy Entertainment, Wynn Macau and Melco Crown -- and breaking a 40-year monopoly held by Stanley Ho’s SJM Holdings Ltd.
SJM, Asia’s largest casino company by revenue, relies entirely on junkets to bring in its VIPs and has no plan to change its full reliance.
“SJM is comfortable with our junket relationships and with the junket system, which operates legally in Macau,” CEO Ambrose So said in an e-mail.
The newcomers, barred from marketing in China and with no legal route to collect debts, had to rely on promoters with agents who could lure VIPS and make sure they paid their debts.
Now, after a decade of operations, the casino companies are familiar with many of China’s well-heeled residents, including those who’ve spent time on their gambling floors.
“Casinos have a much more in-depth database to tap,” said Richard Huang, a Hong Kong-based analyst at CLSA Ltd. They have more opportunities to collect debts too. “With most of the rich Chinese having offshore bank accounts or properties, that gives casinos increased comfort in extending them credit.”
MGM China wants to develop its own customers to help manage risks, said Bowie, the company’s CEO.
“The junket model is a very successful model in terms of efficiency but we need to diversify,” he said. “No organization should limit themselves to one geographic market or one business strength. It’s too high risk.”
A junket operator -- also known as a VIP or gaming promoter -- typically draws a commission for each high-stakes bettor it delivers that’s equivalent to 1.25 percent of the gambler’s rolling chip turnover, or the amount of bets made, said Kenny Lau, a Credit Suisse Group AG analyst in Hong Kong.
Commissions total about 44 percent of the gross revenue from high rollers, according to the brokerage. That means junkets earned about $13 billion in commissions last year, or 29 percent of the casinos’ total revenue, according to data compiled by Bloomberg.
After government taxes of 39 percent, casinos can be left with “rather thin” profits, said D.S. Kim, a Hong Kong-based analyst at BNP Paribas Securities Asia Ltd.
That’s a relative assessment: Sands China, for instance, posted an 80 percent gain in net income to $2.2 billion on revenue of $8.9 billion last year.
To reduce their dependence on the wealthy, casinos have also been adding glitzy shows and shopping malls to draw middle-class families.
“The influence of junkets is decreasing as the mass and the premium mass segments become more substantial,” said Lawrence Ho, co-chairman of Melco Crown and Stanley’s son.
There’s more money to be made. While the junkets are still important partners of casino operators, companies including Sands are working to bypass the middlemen.
The Las Vegas-based company puts its fleet of private jets and limousines at high-rollers’ disposal, night and day, and comps their stays in suites that run to 8,000 square feet and come with on-call concierges, according to its 2012 annual report.
Casinos are also setting up their own high-stakes gambling parlors in Macau, with sizable minimum bet hurdles.
A few years ago, most of these sorts of clubs operated in what a report from the U.S.-China Economic and Security Review Commission, a group created by Congress to monitor China, called “a gray financial market.” They were run only by junkets, as independent contractors renting space inside the casino operators’ buildings and outside the direct oversight of Macau’s gaming regulator, according to the report.
Ho, now 92, had a gambling monopoly in Macau while it was a Portuguese colony and for a few years after the city came under Chinese control in 1999. Loan sharks were often on the lookout for marks in gaming halls, according to a report by the New Jersey gaming enforcement agency, and there was a wave of violence in the 1990s as gangs battled for control of high-stakes rooms.
One of the crime bosses arrested during the decade’s VIP room wars was Wan Kuok-koi, known as “Broken Tooth.” He was convicted in 1999 of loan sharking and triad membership after his arrest during an investigation into a car-bomb attack on the local police chief, and released from prison in December 2012 into a very different city.
Macau has 35 casinos, with more planned, and glitzy hotel towers and shopping malls stocked with brands including Rolex, Dior and Prada. It’s increasingly attracting tourists who aren’t hard-core gamblers with spas, concerts, theaters, fine dining and family-friendly entertainment.
High rollers’ share of Macau gambling revenue peaked at 73 percent in 2011.
Some junkets are diversifying in response. Suncity, for one, has set up VIP clubs in South Korea and the Philippines and branched out to movies, music and immigration consulting, according to its website and a brochure. Still, it continues to serve customers in Macau casinos, including Galaxy Entertainment and Sands China.
Junkets are unlikely to ever be pushed out entirely. That’s both because of their knowledge of wealthy gamblers in China and their willingness to take on credit risks that casinos won’t.
There are more than 200 licensed junket operators in Macau. They have extensive networks in China of people who know the tycoons in a city or province, and have at least a rough idea of individuals’ net worths.
Junket operators can afford to be more liberal with credit extensions than casino operators, according to Hoffman Ma, deputy chairman of Success Universe Group Ltd., the operator of a casino resort in Macau. The U.S.-based casinos typically require more vigorous credit checks, something that VIP players don’t like, according to BNP’s Kim.
“There are limits as to how much casino operators can do in recruiting direct VIPs,” Kim said. “VIPs are loyal to junkets -- but not the casino operators.”
To contact the reporter on this story: Vinicy Chan in Hong Kong at firstname.lastname@example.org