COTAI COMMISSION CAPS

The two Cotai powers colluding to control runaway commission expenses sounds good on the surface.  Cotai versus the peninsula is a battle that started with the opening of City of Dreams on June 1st.  It does make sense for Venetian and CoD to continue to work together and commissions are an obvious place to start.  After looking at the June data and July so far, Cotai is clearly winning the battle.

One issue with self-regulating commission rates is that the other players probably won't follow the cut.  Is Jack Lam going to reduce his commission at the Mandarin from a very lucrative 1.40-1.45%?  I doubt it.  Given the competitiveness in the VIP segment, pricing is a key variable.  Junkets can easily bring their customers to the higher commission casinos.  The second problem is the lack of transparency in junket commission rates.  It's good PR to announce a commission reduction, but will CoD know that Venetian is cheating and vice versa?  Will Venetian know if CoD is making other concessions to the junkets that don't show up in the official junket rate?

Even a government enacted commission cap would be difficult to enforce.  The operators have been expecting government action since late last year and still nothing has been enacted.  We are skeptical of any government action until at least late 2009 when the new Chief Executive takes over.

We continue to believe there is upside in both MPEL and LVS for different reasons, none of which involve commission caps.  For MPEL, the incremental news flow should be positive as CoD continues to ramp.  For LVS, Macau margins could look much better than expected as drastic headcount reductions and numerous one-time expenses will improve "ongoing" margins.


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