HANDICAPPING THE CAP

A trip to Macau changed my mind on the prospect of a junket commission cap. I now believe the Macau government will formally institute a 1.25% cap in the coming months. Don’t think for a second that I was swayed by talking to just the operators. For obvious reasons, most of the operators favor a cap while the junkets would like the current “free market” system sustained. Opinions of these “interested” parties must be discounted. However, other, more independent sources are positive on the prospects for a formal cap.

  • As WYNN displayed with yesterday’s pre-announcement, Q3 is not likely to be a pretty one for the Macau operators. EBITDA margin for Wynn Macau declined 900 basis points sequentially. And they didn’t raise commission rates! As shown in the first chart, market wide EBITDA margin bumped up with the opening of The Venetian late in Q3 and stayed relatively stable through Q2. However, the escalation in junket rates began in Q3. Moreover, the visa tightening constricted demand in a fixed cost business.
  • Clearly, a junket commission cap would be positive for the industry. Who would benefit the most? When you take pricing out of the equation, product wins. That is why Wynn Macau would probably gain the most from a junket commission cap. Wynn Macau’s commission rate lags the market by a wide margin. He hasn’t played the pricing game. As a result, his VIP turnover market share declined 160 bps and contributed to a sequential 18% decline. We believe at least 4 operators are currently offering rates above the proposed 1.25% cap including LVS, Galaxy, SJM, and MGM. I think Starworld (Galaxy) may be offering as high as 1.5%. A return to 1.25% will surely allow Wynn Macau to recapture lost market share.

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