Macau’s Gamble On High Rollers
Gambling revenue in Macau rose by 57% in August 2011compared to the same month last year, meaning another record month. For the first eight months of 2011 Macau’ gambling revenue totalled US$21.6bn, a 46% year on year rise. In August alone gambling revenue was US$3bn.

Of Macau’s six casinos licensees SJM operates 20 casinos, Galaxy five properties, Venetian Macau and Melco Crown 3 casinos each and MGM and Wynn Macau one property apiece. According to Deutsche Bank, Wynn Macau currently has 15% of Macau’ gaming market share, while SJM has 30%, Sands China 16%, Galaxy and Melco Crown 14% each.
However, the pace of revenue growth is not reflected in the share price of Macau’ casino operators. 

In May 2011 Galaxy opened the HK$ 15.5bn (US$ 1.9bn) five-star resort casino Galaxy Macau. With the opening it is expected to increase its market share. Galaxy’s net profits increased by 115% in the first half of 2011 to HK$ 1.3bn. Despite this strong financial performance the value of Galaxy shares increased by only 3% in the last 3 months and actually decreased by more than 9% in August.
For H1 2011 Wynn Macau’ casino revenue increased by 42%, reaching HK$13.5bn, and the VIP segment turnover increased by 48% (HK$482.1bn). With such a good performance it might be expected that the share value of the company would be mirroring the rise in revenues, regardless of the August stock market turmoil. But Wynn Macau’ shares only increased by 3% since those interim results were released. A closer look at the published results, however, can shed light on why the shares have not performed as strongly. 
Wynn actually embodies the inherent weakness of many Macau’ operators’ business model. For the first six months of 2011 Wynn generated total casino revenue of HK$ 17.6bn, of which HK$13.4bn derived from VIP gambling. Wynn also paid HK$4.1bn of commissions and discounts, largely to junket operators, in those six months. Most of the growth in the VIP segment in 2010 (+70%) and in the first half of 2011 (+48% compared to the same period of 2010) is fuelled by junket operators. After paying the junket operators, Wynn’s ratio of VIP segment to total casino revenue is 99.8%, which is quite frightening.
For SJM holdings VIP gaming operations accounted for almost 71% of the Group’ total gaming revenues for the first half of 2011, up from the 66% for the corresponding period of 2010.
In the second quarter of this year, Galaxy Macau had VIP gaming revenue of HK$ 3.1bn out of the total revenue of HK$ 5.1bn.
Deutsche Bank estimates that VIP segment will make up 73% of Macau’s gaming revenue in 2011 and 71% in 2012. It also estimates that the cost of junket operators to be around 30% gaming revenues, almost ten times the cost of labour.
The heavy spend of VIP is also confirmed by the fact that visitor numbers have increased at a much slower pace than the increase of gaming revenue. In 2010, Macau’ gaming revenue increased by 57% compared to 2009, while visitor arrivals only increased around 15%, and this trend continued in the first half of 2011. 
Because the spectacular growth of Macau’s gaming revenue is, and will continue to be for the foreseeable future, dependent on the growth of the VIP segment, the jurisdiction is extremely vulnerable to any economic shock which afflicts the Chinese economy. The Chinese economy is currently growing strongly, but the recession of 2009 has demonstrated that China is not immune from an economic contraction in developed economies. According to analysts, at the height of the recession in the west in 2009, the VIP segment increased by only 8%, while in 2007 it increased by 52%, 32% in 2008 and 70% in 2010. China was not in recession in 2009 but economic sentiment in the country fell. 
If the West falls into another recession it will very difficult for Macau’s casino operators to keep on growing as they have been doing in the last year and a half.