An interesting postscript to SJM’s strong figures for the first quarter of 2010 is the performance of the so-called ‘satellite casinos’.
The satellite properties contributed more revenue to the SJM balance sheet than the company’s flagship Grand Lisboa and the company’s other directly managed properties (known as self promoted casinos within the SJM group—Casino Lisboa, Casino Oceanus and Jai Alai—combined.
The arms-length operations produced revenues of HKD6.6 billion (USD850 million) in the first quarter, compared to Casino Lisboa’s HKD3.2 billion and the self-promoted casinos’ contribution of HKD3 billion.
Adjusted EBITDA (earnings before interest, taxation, depreciation and amortisation) on the so-called satellites is, however, proportionately smaller than adjusted EBITDA on the other properties. This is because SJM has to share the revenues with the owners of the satellite establishments.
The satellites are 14 casinos that operate on an SJM gaming licence, but are owned and managed by third parties. They include some of Macau’s most famous ‘legacy’ casinos such as The Golden Dragon as well as newer properties such as The Grand Emperor Hotel & Casino that opened in January 2006.
What they all have in common is that they are predominantly VIP-focused operations that appear to have been able to ride the tidal wave of VIP revenue growth seen in Macau in the first five months of the year.
Although SJM doesn’t own the economic benefit of all the gross revenue (less tax) because of the satellite relationship, it is nonetheless a very profitable business for SJM.
A common denominator of the satellites—though the formula varies from property to property—is that they all give a percentage of their gross to SJM in return for their access to an SJM gaming licence. That percentage of the gross amounts in some cases to almost 100 percent profit for SJM, depending on whether SJM is contractually required to offer marketing support and table dealers as part of the satellite agreement.
Some of the casinos in this satellite grouping pay five percent of their gross to SJM. Those using a more traditional arrangement—common prior to market liberalisation in 2002 when SJM had a monopoly—operate on a 40:40:20 model (i.e., 40 percent to the government in tax, 40 percent to the property owner and 20 percent to SJM.
SJM has been steadily switching its profit sharing agreements from the 40:40:20 model to a 40:55:5 arrangement (40 percent for the government in tax, 55 percent for the owner and five percent for SJM). The benefit of this latter system for SJM is that the property owners must assume all of the labour costs, which have been steadily rising in Macau, with the median wage for a casino dealer in the first quarter of 2010 now standing at 13,000 patacas (USD1,600) a month, according to data from Macau’s Statistics and Census Service.
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