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Is A-MAX going to stay with Crown?

Last edit: jcdarosa on Thursday, 12th June 2008 8:41 am
Last response by macauman 13th June 8:35am

With the new commission cap that we all know about, it is clear that the deal between A-MAX and Crown, as well as between A-MAX and the individual junkets, will need to be re-negotiated.

I believe there is a high likelihood that junkets under A-mAX will continue to stay under the A-MAX umbrella, but then the big question is, will A-MAX stay with Crown, or sign a new deal with a different operator.

Crown and A-MAX had a 3year contract, but with this commission cap I assume that this agreement gets voided and a new one will need to be made. So, will A-MAX sign a new deal with Crown (MPEL)?


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 Chuckmonster responded on Thursday, 12th June 2008

If there's no way to increase their commission, the only way AMAX can increase profits is to increase volume - bigger or more fish - a notably difficult proposition given the size of Crown's tank. This is where a pair of eyes on Crown's casino floor comes in handy. Are they operating at table capacity? What is the average bet at the tables in operation? Do players appear to be enjoying themselves? Are the restaurants busy?

I can guess that the only way to know if there is an 'out' to the MPEL/AMA agreement would be to read the contracts, which are most likely covered by an NDA.

The tipping point is whether or not MPEL can keep AMAX happy until City of Dreams opens. Not only will COD provide more capacity, but it will provide true spectacle and 50% more reason to visit Cotai/Macau again. Have you heard any grumblings that AMAX is unhappy with the deal and is looking to renegotiate?

 macauman responded on Thursday, 12th June 2008

I wouldn't worry about the AMAX/MELCO partnership. Why mess up a good thing? All recent press releases suggest the relationship is a win/win and will continue for a number of years.

Link to Amax press release:

This shareholder meeting just occured. Notice the paragraph:

Mr. Chan concluded, "A-Max is solidly positioned to continue achieving strong monthly rolling chip volumes as evidenced by our ability to generate more than HK$40 billion of rolling chip volume in each of the first five months of 2008. With a strong business model in place and an ability to achieve additional growth through our exclusive Gaming Promotion agreement with Crown Macau, we believe we can generate near- and long-term value for our shareholders."


Plus during MPEL's last conference call they said that AMAX is excited about extending their exclusive agreement to City of Dreams.
An article from an investment news service sent to clients very recently:

"Macau became safe eight years ago ... when the last gangster was killed."

Downtown Macau on a Saturday night. It's
already bigger than Vegas and has 10 times
the growth potential.

We can't verify that as a true statement, but it's what we heard from Hong Kong denizen (and Global Gains subscriber) Deepak Madnani when we met him last night for drinks. Now, while no one should feel good about this kind of addition by subtraction, the fact is that the subtraction of violent gangsters from Macau has turned this special administrative region of China into one of the great growth stories of the past decade.

Macau is now bigger than Vegas. Much bigger. By 2010, it's expected to do $23 billion in revenue. This makes Macau's gaming industry -- unlike its blackjack tables, as Bill found out -- one of the surest bets on earth. And since there are only six casino companies licensed to operate in Macau, it's pretty easy to place your bets.

Pick your play
Melco Crown Entertainment (Nasdaq: MPEL) is one of those six licensees. It bills its Crown Macau Hotel & Casino as a six-star resort. And though the hotel spit at convention and awarded itself the sixth star, it is legitimate. From the marble lobby overflowing with attentive staff to the 38th-floor sky lounge bedecked in teak and stocked with champagne and single-malt scotch, there is no escaping the property's luxury.

But luxury is not the story here ... not anymore.

The Crown Macau has undergone a substantial repositioning since it opened just last year. While it was designed to cater to the very highest of the island's high rollers, the company quickly discovered that that was not a viable business plan. Not yet, at least, and not at the hotel's location on Taipa away from Macau's main drag.

We make friends at Melco HQ.
So instead of chasing after high rollers, the company struck a deal with junket operator A-Max to have lesser, though still serious, gamblers brought to them. The new strategy is working. The company reported its first full quarter of profitability last quarter on casino revenue that was up nearly 200% -- to $480 million.

If you're not familiar with Macau, you may not know what a junket is and why the A-Max deal was such a boon for the company. But knowing local details like that is the reason Melco Crown has been able to gain the upper hand against U.S.-based competitors such as Wynn Resorts (Nasdaq: WYNN), MGM (NYSE: MGM), and Las Vegas Sands (NYSE: LVS).

It's also why we paid a visit to Melco CFO Simon Dewhurst, who revealed to us exactly why A-Max has helped the Crown Macau become the busiest casino in the world.

Bet big, bet often
According to Dewhurst, 75% of gambling revenue in Macau comes from rolling chip baccarat. The folks playing the game obtain credit from a network of agents and lenders, at the top of which sits A-Max -- the "super junket" that has struck a deal with Melco to get prime space for its players. While Melco won't get involved in the web of lending money to these players (a web that may or may not involve thugs with baseball bats), the credit from A-Max is what allows the junket-enlisted players to play longer and bet bigger ... which they're more than happy to do.

The Crown Hotel's infinity pool overlooking Macau.
Thanks to the popularity of junket baccarat,
it may never be used.
These players -- by virtue of their access to credit -- are classified as VIPs by most analysts who cover Macau. But they're not really. Rather, as we saw during our tour of the Crown's private gaming areas, they're chain-smokers in tacky suits who don't use the hotel's spa, dine at its multiple signature restaurants, or swim in its sumptuous 16th-floor infinity pool overlooking downtown. They even forego staying in the Crown's immaculately appointed rooms, instead day-tripping to the island or packing three to a room in a $60-per-night fleabag joint elsewhere in Macau. What's more, the prospect of rubbing shoulders with "these people," Dewhurst said, actually chased away the VVIPs that the Crown Hotel was designed to cater to.

That fact, however, is OK for now -- particularly since A-Max's delivery of this clientele has made the Crown Macau's No. 1 spot for rolling chip baccarat. But it's also why Melco Crown is already at work on its next project, the vast City of Dreams.

Meet mega Macau
Whereas no one swims in the Crown's infinity pool, the City of Dreams may need five or six of them. Set to open next year, the City of Dreams will be twice the size of the Crown and significantly more luxurious. It will target high rollers and cash gamblers more successfully than the Crown has thanks to a greater focus on entertainment (it will have an aquatic stage) and a prime location next to the vast new Venetian, which is designed to attract conventioneers and overnight guests by the thousands.

There's a bit of a "If you build it, they will come" mentality underlying this. But "it" is already being built, and Dewhurst believes "they" will definitely show up. "You could put another zero on the end of Macau's [gambling] revenues," Dewhurst claims, "and that still wouldn't put a dent in the asset base of Macau's likely visitors."

In other words, Dewhurst estimates Macau to be a $70 billion opportunity -- and one that, again, has just six licensed operators. And while Dewhurst says that "all six of us will make a fortune," he hopes that Melco Crown will do best given its local ties. See, Melco Crown is run by Lawrence Ho, son of notorious Macau patriarch Dr. Stanley Ho. That's a unique competitive advantage for Melco, a topic for a very long and interesting book, and the reason why the Crown has (and will likely keep) its exclusive deal with A-Max.

The inevitable entertainment epicenter of Asia
Because Macau is located near fast-growing economies that are home to one-third of the world's population, the folks at Melco believe -- as we do -- that it will achieve its growth goals. That's why they are making strategic decisions with five- to 10-year time horizons, and it's why we've recommended the stock at Global Gains.

Gambling, Dewhurst says, is hardwired into the DNA of the people in this part of the world, and the Ho family is hardwired to make money from that fact. Put those two observations together and, well, you do the math. Good riddance to those gangsters indeed.

Also, this just came out today from the macaodaily newspaper {link using Google translation} --Looks like Melco-Crown is adding more tables with an agreement with a Hotel Tapai (Royal Ascot Casino), at Tapai Square. Hmm,I hadn't heard about this yet, but it must have been in the pipeline (and already approved by the Gov.) to be up and running now.

 macauman replied on Thursday, 12th June 2008

Other bits from the same interview with Crown's CEO:

"The second is that China's relations with its SARs must always be viewed through another lens: Taiwan. Melco Crown (Nasdaq: MPEL) CFO Simon Dewhurst noted this when I asked whether China would consider setting up competing gaming destinations, such as Hainan Island.

Dewhurst said that there was no way China would ever take away Macau's golden goose. That's because if there is ever to be the re-unification of China that the government seeks, it would only be possible by absorbing Taiwan as an SAR. For that to happen, China needs to demonstrate just how beneficial SAR status can be. (Incidentally, that's another feather in Melco Crown's cap when it comes to controlling its marketplace.)"

He argues that, since observers haven't seen a situation quite like this before, they can't accept that this kind of growth is sustainable. For Dewhurst, this is specifically relevant to Macau, where he says analysts have "reverse engineered" reasons to support their skeptical worldview.

Dewhurst described rolling chip players as the 5,500-6,000 players a day that come for one or two days to play baccarat and only play baccarat. They arenít interested in the unbelievable zero horizon pool or the lush sky lounge or the wonderful spa. They plunk themselves down at a table and gamble until they have to catch the ferry back or they run out of money.

Most importantly, they arenít super rich. They are normal Joes looking to get their baccarat fix. These players donít care about how many stars your hotel boasts, they care about credit availability, and here is where the junkets come in.

Junkets provide players with lines of credit which are the only way you can play rolling chip games (see below for more on extension of credit). With AMA, MPEL had 16 junkets working with the Crown. They brought in the rolling chip players by the scores and helped push Crownís market share of VIP gaming to 25%.

In other words, Dewhurst estimates Macau to be a $70 billion opportunity -- and one that, again, has just six licensed operators. And while Dewhurst says that "all six of us will make a fortune," he hopes that Melco Crown will do best given its local ties.

 Chuckmonster responded on Thursday, 12th June 2008

Thanks for that treasure trove macauman. If we had any loot over here, we'd hire you to write for us in a snap... you're research skills are incredible to say the least.

The last point is fascinating, but I wouldn't read much into it. The Taipa Casino (at Regency) is a puny little room right off the main lobby that has maybe 10 tables max. When I walked through there, the players all started talking to me and inviting me to come join the game like it was some kind of home poker game. It's intimate to say the least. It's currently an SJM joint, which raises a whole bunch of logistical questions - ie did they force out SJM? How did the Macao gov approve this so fast? Is SJM getting a pinch of the RCV?

If they were to do this at the Greek Mythology (also in the Taipa 'hood) it would be infinitely more newsworthy as that place is relatively large. Plus AMA owns a big piece of that property already, if I'm not mistaken.

I actually had a much more enjoyable time gambling at Greek Mythology than Crown... they've got a handful of great pay table VP machines with a view of the low-grade floor show nearby. Mmmm Macau/Portugese girls writing on stripper poles as John Cougar blasts through the P.A. yummy.

 macauman replied on Thursday, 12th June 2008

Thanks Chuck, I aim to please. I never really followed the industry till they announce Macau expansions from las vegas. Now i feel like i have a pretty good grip on the gaming industry.

Yeah, I agree about the latest hotel Tapai deal. I don't think it is too much of a big deal, and it may be kind of a "lower class" hotel (or at least not up to par with even some of the smaller SJM joints). But hey tables are tables, and if Amax wants more for some of their low-level clients (to make more room at Crown), they can accomodate them over there now.

In Melco's Annual 20-F they noted, in a vauge paragraph, that they were doing a major remodeling/expansion at that hotel Tapai for about 4 months beginning in the 1st Quarter of 08' (where they previously had one of their Mocha Clubs on several floors), but mentioned nothing of adding acutal Gaming Tables. So it is a bit of surprise to me.

--If you want to get real specific--
On page 38 of the following link it shows all the locations and sizes of all the "current" Mocha Clubs operated by Melco-Crown (Hotel Tapai -Mocha Clubs opened in 2006):

Melco-Crown had a service agreement with SJM (Papa Ho) for the Mocha Clubs back in the day, but they terminated that agreement and bought him out (mocha club business) in 2006, after Melco-Crown got their own gaming licence. Previously, they had to use his gaming licence as they didn't heave their own at the time. So they won't share any revenues with SJM for any of their Mocha clubs or other casinos anymore. Greedy bastads, they want all that loot for themselves. That $900 million gaming sub-concession licence suddenly isn't so expensive, eh?

 macauman replied on Thursday, 12th June 2008

I think this is the joint they are talking about. It already had a Mocha Club ops. there.

List of the all the current Mocha Clubs (The table may show up looking funny):

Mocha Club Opening Date Location Area
(in sq. ft.)

Royal September 2003 Lobby of Hotel Royal 8,500
Kingsway April 2004 G/F, Kingsway Commercial Centre 6,100
TP Square March 2005 G/F and 1/F, Hotel Taipa Square 4,560
Sintra November 2005 G/F and 1/F, Hotel Sintra 5,110
Hotel Taipa January 2006 G/F of Hotel Taipa 6,100
Marina Plaza December 2006 1/F & 2/F Marina Plaza 12,500
Mocha Square October 2007 1/F, 2/F and 3/F of Mocha Square 6,000

Total 48,870

 macauman replied on Friday, 13th June 2008

A fresh take on the new Melco-Crown deal.

 jcdarosa responded on Friday, 13th June 2008

Wow macauman, I gotta agree with Chuck. You have access to some really invaluable info. Really appreciate you sharing it with us.

Besides the new extension to the Hotel Taipa, I was actually a bit surprised by the description of their typical VIP rolling chip player:

"...they're chain-smokers in tacky suits who don't use the hotel's spa, dine at its multiple signature restaurants, or swim in its sumptuous 16th-floor infinity pool overlooking downtown. They even forego staying in the Crown's immaculately appointed rooms, instead day-tripping to the island or packing three to a room in a $60-per-night fleabag joint elsewhere in Macau. What's more, the prospect of rubbing shoulders with "these people," Dewhurst said, actually chased away the VVIPs that the Crown Hotel was designed to cater to."

I don't get it. From what I understood, a VIP was someone willing to put up HK$1 million (~US$125,000) to gamble. If they have that much money to gamble, what are they doing being (or acting?) so...'cheap'? Though I do have to say the description of these players is quite accurate, as it quite fairly describes the type of clientele I saw when I visited the Crown a few weeks ago.

But if that is the case, where are all the VVIPs going? Wynn? SJM casinos? Venetian? Hopefully with City of Dreams, Melco Crown can attract VVIPs to play at their joints instead of at their competitors'.

All in all, I'm a bit confused. Here is what I gather: 1) VIPs it seems are not actually that wealthy, and it is really only the VVIPs that can be considered 'high rollers'. 2) Rolling chip players include both VIPs and VVIPs. 3) VIPs are measured by how much they use to play (HK$1 million??). Is this all true?

 macauman replied on Friday, 13th June 2008

I think you've pretty much got it jc.

Technically, in Macau, a VIP is someone who uses a junket to gamble at casinos. The gamblers can only bring so much yuan to convert per day due to the non-convertibility/government limitations of the yuan/renminbi. So they have to use junkets for access to more money to gamble with (some of the people that don't wager as much don't need the junkets and are labled "mass market").

This creates the term rolling chip volume,(from the so-called VIPs), the amount wagered. The RCV is split (based on the casinos hold rate) with the junkets/casinos as per their agreements, either through a revenue share model or a fixed commission rate structure.

Don't get me wrong there are those that come in and drop $125,000 per night at the drop of a hat, like they are buying chewing gum. Lots of them! But, VIP (based on RCV) is misleading. The Crown strictly catered to these V-VIPS prior to Amax. But Crown realized they could make more (and have a safer business model, with less fluctuations/volitility) by bringing in more volume from more people, instead of lots of volume from a very small group of people.

I feel more confident that the RCV is generated by lots of average Joe's, instead of a handfull of uber-wealthy Hong Kong types that are likely to be highly mobile to other casinos.

That's not to say that those V-VIPs aren't valuable comodities. However, during the interview Mr. Dewhurst says that he believes he will get all of the V-VIPS (the super rich) back once the City of Dreams is completed, which according to him will be far more luxurious than that of the already "six-star" Crown. And it will be much more spacious with better facilities/entertainment. They still have quite a few of the V-VIPs at the Crown, just not as many as prior to Amax coming on board. But you likely won't see them in the Crown Casino unless you have greater than $125,000 per day to get access to go up to the top floor VVIP rooms where the real action is.

Hope that helps. If you visited the Crown a few weeks ago, you have more of the "goods" than I do, as i have to go based on what i read/hear. I just use google and a handful of industry contacts and management phone calls to get my info. But I'd much rather get a taste first hand.