Despite the fall in casino stocks in Hong Kong last week following the statement from Chief Executive Fernando Chui Sai On that the Macau government would step up control over the gaming industry, it appears that the cap on gaming tables will not hinder the present expansion plans of casino operators. SJM Holdings’ chief executive officer Ambrose So has said that if the allowed annual growth of tables is to be 3-5% this still will allow for sustainable development of the Macau gaming industry.

In its proposed budget the Macau government expects to obtain some US$7.2 billion in 2011 from its 35% tax on gross gaming revenue. The figure is believed to be a conservative estimate by many analysts as it would mean a year-on-year contraction of the industry. However, it does represent a 42% increase on the 2010 budget figure. This year gross gaming revenue in Macau is already up 58.8% on figures for the first ten months of 2009. Macau, once known as the Monte Carlo of the Orient or the Las Vegas of the East, is now the largest gaming city in the world and it is estimated that the gaming industry provides over 70% of the Special Administrative Region's total fiscal revenue.

The government recently confirmed it would increase supervision of the auditing of casino financial records and that procedures and background checks for junket operators are being tightened. As Professor I Nelson Rose, recognized as one of the world’s leading experts on gambling law, says on his Gambling And The Law website, “Junkets are at the heart of gaming revenue for Macau’s richest casinos. They are so important, in fact, that junket operators get a much larger share of money lost by high-rollers than the actual casinos. Junket operators complained when the Macau government, at the urging of its casinos, put a cap on commissions, claiming that they have to give large kickbacks to losing high-rollers.”

He adds, “Junkets exist so gamblers from the mainland can get their money to Macau. Gambling debts are not legally collectable in China. There is very little fiscal infrastructure, since most Chinese do not have bank accounts, let alone credit cards and credit histories. So the junket operators bear the risk when they lend money for gaming.” Professor Rose concludes that times may be changing. “Macanese law was changed a few years ago to allow casinos to loan money directly to players. A Hong Kong court recently issued a ruling that should allow Macau casinos to collect there. And there may be a way to get the PRC to enforce judgments from courts in Hong Kong or Macau.”

The 1.25% cap imposed on commissions paid to VIP gambling promoters, effective from December 2009, is largely ineffective as the cap only applies to rolling turnover and does not limit net win sharing arrangements. If China is looking to restrict the easy flow of credit and takes a leaf from Singapore’s casino regulation book, which asks for junket operators to provide 10 years of accounting records, then the Macau junket industry could come under pressure. As it presently provides around 70% of the liquidity in Macau casinos this could affect the casino revenues in the future. As Professor Rose comments, American states that have granted casino licences to US companies now operating in Macau are concerned about the junket operations that are virtually independent mini-casinos in Macau’s US-owned casinos.

Only last week Asia Entertainment & Resources Ltd (AERL), which operates through its subsidiaries and related promoter companies as a VIP room gaming promoter, announced that through AERL's wholly-owned subsidiary it has completed the acquisition of 100% of the profit interest in the operations of King’s Gaming Promotion Limited (KGP), a Macau-based VIP room gaming promoter that currently operates one room with five tables at the Venetian Macao Resort Hotel on the Cotai Strip. KGP has maintained an average Rolling Chip Turnover of approximately US$129 million per month over the past ten months under the fixed 1.25% commission on Rolling Chip Turnover. (E-11.22.10)

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