LVS: MARGIN PRESSURE?

Our crystal ball is telling us that some margin compression may be in LVS’s future.  

While everyone is focused on the weekly and monthly top-line numbers out of Macau, we think margin pressure is building, particularly for LVS.  Labor pressure will hit all Macau properties this year and potential upward pressure on commission rates/player rebates, and junket credit could also hurt margins.

Starting with the obvious, Four Seasons is likely to experience the most compression.  Before LVS transformed the Four Seasons into a primarily junket property, about 40-50% of VIP play at the property was driven by direct play.  For the last few years, Four Season’s all-in commission expense (including rebates) was running at under 1.1% and at least 10bps below their sister properties.  LVS recently struck pretty aggressive deals with several junkets and specifically with Neptune.  So the incremental business is coming in at a materially lower gross margin and VIP revenues are comprising a larger component of the pie – both of which should pressure margins.  Based on January’s low hold and assuming normal hold in February and March, we estimate EBITDA margins of 21% in 1Q12 and 25.5% for the full year. This compares to 33.4% in 1Q11 and 32.1% for 2011.

For Sands Macau and the Venetian, we expect mild margin compression caused by:

  • Slowing market growth and cannibalization from the opening of Sands Cotai Central
  • Labor inflation, exasperated by the opening of Sands Cotai Central
  • Pressure from junket commission consolidation

In the 4th quarter, we saw a few signs of margin creep:

  • Given the huge incentive rents being paid in 4Q, one would’ve expected better margins at Venetian and Four Seasons
  • YoY fixed costs increase at Sands and Venetian
    • Sands Macau saw the 3rd straight quarter of YoY cost increases following deep cost cuts in 2009 and holding expenses flat in 2010.  We estimate that fixed costs increased 12% in 4Q and 6% for the year.
    • After 11 quarters of fixed cost decreases, it looks like costs increased in Q4 by 3.5% YoY.  Prior cost cuts at Venetian were achieved through better expense and inventory management including the reduction of tables from 850 tables at opening to 577 tables at year-end.
  • Rebate rates shot up at Sands and Four Seasons
    • At Sands, rebates increased to 37% from 33% in 4Q10.  For the year, rebates increased to 36% from 33% in 2010
    • At Four Seasons, the 4Q rebate rate was 35% of win or 92bps vs. 28% for the first 9 months or 85bps