Melco dives after partner reports VIP chip sales drop
Neil Gough Sep 12, 2008
Shares in Lawrence Ho Yau-lung’s Melco International Development fell yesterday after the Macau casino investor’s VIP gambling junket partner reported a plunge in business from high rollers.
Amax Entertainment Holdings, whose junket arm has an exclusive deal to take high rollers to Melco’s Crown Macau casino, said VIP chip sales fell to HK$33 billion last month, down 17.5 per cent from July and its worst performance this year.
Amax blamed Beijing’s new round of restrictions on mainlanders travelling to Macau and also the Olympics which it said reduced casino visits among low-tier players.
Melco’s shares dropped as much as 12.23 per cent in trading yesterday but recovered to close down 5.71 per cent at HK$3.47, nearly a four-year low.
The slide tracked Wednesday’s 11.35 per cent drop in the share price of the firm’s Nasdaq-listed casino unit, Melco Crown Entertainment, a joint venture with Australian James Packer’s Crown.
Investors have been struggling to determine what impact the Macau government’s proposed across-the-board 1.25 per cent cap on junket commissions will have on the VIP gaming market and, specifically, Amax’s deal to bring high rollers to the Crown.
Since December last year, Crown has paid Amax’s junket unit a top-of-the-market commission of 1.35 per cent on its VIP chip sales at the casino. The government-mandated cap means the existing Amax agreement will be rendered null.
“We expect that following the implementation of the commission cap we will revise our agreement with Crown Macau in a manner that will benefit Amax, our casino partner, junket operators and their players and our shareholders,” Amax chief executive Ted Chan Ying-tat said in a statement.
Analysts are divided over the effect of the cap. Jeffries & Co analyst Larry Klatzkin wrote in a research note that the lower commissions could improve Crown’s profit margin on its Amax VIP business by about 3 per cent.
But while acknowledging the positive margin effects of lower commissions, Citigroup analyst Anil Daswani wrote that junkets in Macau, who provide the players and thus the casino revenues, would not easily swallow a decline in their own margins.
Instead, junkets are likely to cut the rebates they now offer players as incentives to gamble which could lead to lower casino revenues across the market.
Shares in Melco, which has a 37.9 per cent stake in Melco Crown, have fallen 70 per cent in the year to date and are down 85 per cent from their peak in December 2006, just before the casino venture was spun off in a US$1.14 billion Nasdaq offering.
Credit Suisse analyst Gabriel Chan said Melco now would make an attractive takeover target.
Citing its heavily discounted valuations and net cash position at the corporate level, Mr Chan wrote in a research note that Mr Ho, who controls 43.72 per cent of the firm, “should seriously consider privatising the company”.
Amax’s shares yesterday ended 1.82 per cent lower at 27 HK cents.
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Melco dives after partner reports VIP chip sales drop
Neil Gough
Sep 12, 2008
Shares in Lawrence Ho Yau-lung’s Melco International Development fell yesterday after the Macau casino investor’s VIP gambling junket partner reported a plunge in business from high rollers.
Amax Entertainment Holdings, whose junket arm has an exclusive deal to take high rollers to Melco’s Crown Macau casino, said VIP chip sales fell to HK$33 billion last month, down 17.5 per cent from July and its worst performance this year.
Amax blamed Beijing’s new round of restrictions on mainlanders travelling to Macau and also the Olympics which it said reduced casino visits among low-tier players.
Melco’s shares dropped as much as 12.23 per cent in trading yesterday but recovered to close down 5.71 per cent at HK$3.47, nearly a four-year low.
The slide tracked Wednesday’s 11.35 per cent drop in the share price of the firm’s Nasdaq-listed casino unit, Melco Crown Entertainment, a joint venture with Australian James Packer’s Crown.
Investors have been struggling to determine what impact the Macau government’s proposed across-the-board 1.25 per cent cap on junket commissions will have on the VIP gaming market and, specifically, Amax’s deal to bring high rollers to the Crown.
Since December last year, Crown has paid Amax’s junket unit a top-of-the-market commission of 1.35 per cent on its VIP chip sales at the casino. The government-mandated cap means the existing Amax agreement will be rendered null.
“We expect that following the implementation of the commission cap we will revise our agreement with Crown Macau in a manner that will benefit Amax, our casino partner, junket operators and their players and our shareholders,” Amax chief executive Ted Chan Ying-tat said in a statement.
Analysts are divided over the effect of the cap. Jeffries & Co analyst Larry Klatzkin wrote in a research note that the lower commissions could improve Crown’s profit margin on its Amax VIP business by about 3 per cent.
But while acknowledging the positive margin effects of lower commissions, Citigroup analyst Anil Daswani wrote that junkets in Macau, who provide the players and thus the casino revenues, would not easily swallow a decline in their own margins.
Instead, junkets are likely to cut the rebates they now offer players as incentives to gamble which could lead to lower casino revenues across the market.
Shares in Melco, which has a 37.9 per cent stake in Melco Crown, have fallen 70 per cent in the year to date and are down 85 per cent from their peak in December 2006, just before the casino venture was spun off in a US$1.14 billion Nasdaq offering.
Credit Suisse analyst Gabriel Chan said Melco now would make an attractive takeover target.
Citing its heavily discounted valuations and net cash position at the corporate level, Mr Chan wrote in a research note that Mr Ho, who controls 43.72 per cent of the firm, “should seriously consider privatising the company”.
Amax’s shares yesterday ended 1.82 per cent lower at 27 HK cents.
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