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