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Melco Needs Macau Momentum

In the third quarter, Melco reported its first full quarter of data for Crown. While revenue was decent at $98 million, the casino posted a loss, hurting from a high cost structure and volatile VIP play.

To fix matters, Melco signed an agreement with A-Max Holdings, an Asian holding company. A-Max is supplying capital to Ama International, which acts as an aggregator for junket operators. In the Macau casino market, VIP customers are brought into casinos by junket operators.

This week, A-Max finally raised $2 billion in Hong Kong currency through a placement on the Hong Kong exchange.

Under the agreement, Melco is guaranteed $30 billion (Hong Kong), or $3.8 billion in U.S. currency, of VIP chip bets each month. Effectively, this doubles the VIP rolling chip volume at Crown Macau. In return, Melco will pay Ama a commission ranging from 1.2% to 1.35%.

Yet this guarantee seems to be little more than a promise. If A-Max can't deliver, then it appears Melco has little recourse.

Doubling the chip volume makes the Crown Macau profitable. But can it really be done?

I remain skeptical. For one thing, Wall Street analysts have been incredibly bullish on the deal. While a partnership could bring substantial profits, I'm still worried the deal could end up being a bust.
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