HONG KONG Macau's expanding gaming revenue has helped cement the former Portuguese colony's position as the world's largest gambling destination, surpassing Las Vegas five times over.
While thousands of Chinese pour into Macau's cavernous casinos every day, the real money is made inside VIP rooms that are mainly controlled through the enclave's opaque junket system.
In recent weeks, Macau's junkets have attracted increasing attention from investors because of worries that their funding channels may have their roots in China's underground lending market, a legal grey area but a key financing channel for the legions of small and medium-sized enterprises in China.
Macau casinos have become extremely reliant on the VIP high-roller sector, which accounts for more than 70 percent of revenue.
- VIP junket operators, also known as VIP room promoters, act as facilitators for Macau's billion-dollar casinos, guaranteeing a certain amount of revenue from China's wealthy gamblers, luring them with free accommodation, travel and other perks in Macau, the only place in China where casino gamble is legal.
- Macau's six licensed casino operators -- Wynn Macau Ltd (1128.HK), Sands China Ltd (1928.HK), Galaxy Entertainment Group Ltd (0027.HK), SJM Holdings Ltd (0880.HK), MGM China Holdings Ltd (2282.HK) and Melco Crown Entertainment Ltd (MPEL.O) -- provide gaming facilities, dealers, chips and a monthly commission to VIP junket operators in return for a minimum guaranteed rolling chip turnover per month.
- Macau's biggest VIP junket operators include Sun City, Neptune Group Ltd (0070.HK), Dore Holdings Ltd (0628.HK) and Asia Entertainment and Resources Ltd (AERL) AERL.O. There are more than 190 licensed junkets in Macau with the top 40 accounting for 80 percent of total VIP revenue.
- The VIP junket operators have a network of agents, known as sub-junkets whose job it is to select VIP patrons to gamble. Sub-junkets, or agents, are usually localized groups around China and familiar with the credit history of their clients. The sub-junkets receive commission from the VIP junket operators for giving credit to gamblers and are responsible for collecting debts.
- Junket agents in Macau usually operate on a two-week debt-collection cycle, so a rise in bad gaming debts would likely be quickly offset by a pullback in new credit issuance.
- Macau has two types of remuneration models for paying VIP junket operators. The commission model is a fixed rate of 1.25 percent of VIP rolling chip turnover and the casinos remain responsible for gaming taxes. The win rate model is when VIP junket operators split the gross gaming win with the casino and also share the downside risk.
* Sources: brokerage research reports, Asia Entertainment and Resources and Reuters reports.
(Editing by Charlie Zhu and Chris Lewis)