Casino operator NagaCorp Ltd is reducing the incentives it offers to junket operators in order to contain rising sales costs and increase profit margins from the Asian VIP market at its NagaWorld casino complex in Cambodia, the company said in its 2015 annual report.
“For 2016, [NagaCorp] has revised its overseas junket incentive programme in order to improve its margins as it captures a larger share of the Asian VIP gaming market,” it said.
NagaCorp initiated the junket incentive program in March 2013 in a bid to increase VIP traffic to the gaming floor at NagaWorld, particularly high-rollers from China looking to circumvent the mainland’s ban on gambling.
The company has signed contracts with a number of Chinese junket operators and more recently with North Asian operators. The program is driven by two Airbus A320s leased to Bassaka Air, as well as several smaller jets, used to fly in high-rollers it hopes will lose big at its gambling tables.
The company attributes its growing VIP market share to the program’s success, which has enabled it “to increase existing table limits while managing volatility and credit risk.”
NagaCorp posted solid growth last year in the VIP segment served by these junket operators. Revenue from the VIP market grew by 18.5 per cent to $222.9 million in 2015, compared to a year earlier, accounting for a substantial 44 per cent of the company’s total revenue. Yet both the high cost of bringing in VIPs and their vexingly low 2.8-per cent win rate has cut into margins.
NagaCorp’s cost of sales – weighed heavily by incentives for junket operators – rose by 33.6 per cent last year. Meanwhile, the company said the VIP segment’s gross profit margin, which was an impressive 37 per cent in 2014, fell to 27 per cent last year “due to higher incentives paid to overseas junket operators and a lower win-rate.”
Since January, NagaCorp has begun scaling back the incentives it offers to junket operators in an effort to lower sales costs and increase its profit margin, the company said, without providing specifics.
Lorien Pilling, director of Global Betting and Gaming Consultants (GBGC), said NagaCorp’s attitude toward junkets “seems to go in cycles.”
The company rolled out its most recent junket incentive program three years ago just as Macau’s junkets were being hit by China’s graft crackdown, and has benefitted from operators’ willingness to divert players from Macau.
While NagaCorp has not abandoned its reliance on junkets, its decision to reduce incentives could tax existing partnerships.
“The difficulties in Macau over the last few years have put other Asian casinos in a stronger position to attract junkets and negotiate with them,” Pilling explained.
“Nevertheless, the market is still competitive, and junkets will always divert their customers to the casino that gives them the best incentive to do so – as long as the casino meets the gambling needs of their customers.”
He said the main benefit of junkets to casinos is a steady supply of high-rollers committed to gambling a certain amount of chips or for a certain time.
The casinos usually give junket operators a share of the losses from the VIPs they bring in, but must ultimately “balance the costs of servicing the high-end players and the revenues they bring.”
According to NagaCorp’s annual report, about 70 per cent of the company’s $175.8 million cost of sales went to covering the tab of its five largest junket operators, which collectively brought in just under a third of the company’s $503.6 million revenue.
“[The balance] does seem a bit out of kilter,” Pilling said.