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Macau Junket Commissions Approaching Junk Bond Yields?

Only the government can save them now. VIP junket commissions up again, crimping margins. Short of government intervention, commissions may bump up against the break even rate of 1.5%.
  • This is a gross exaggeration I know, but I am increasingly alarmed by the junket price war. Our sources indicate that LVS may have boosted its commission again, from 1.25% of roll to 1.3%, and I think that MGM may have moved even higher than LVS. No indication on Crown but if I had to guess I'd say MPEL will or already has followed suit. The first exhibit examines the relationship between escalating junket commission rates and declining theoretical EBITDA margins on VIP revenues. I estimate the casino's break even on VIP business around a commission rate of 1.5%.
  • No word yet on WYNN but I'm skeptical that they can hold out any longer. WYNN has proven to be the best operator in Macau and their performance resilient despite an uncompetitive junket rate. At some junket rate, price will win over product, at least with some junkets and players. I'm not sure we are there yet but any market share loss or softening of its junket position could be a major dent to this Bugatti. WYNN's stock has been a massive outperformer relative to the group and deservedly so. Could WYNN's stock become a victim of its own success? Follow the junket rates and market share.
  • Todd Jordan Managing Director Gaming/Lodging/Leisure

SBUX - Older, Bolder Brews Return

Starbucks posted on its My Starbucks Idea website, that it is returning some of its bolder brews to its stores on an all day basis in response to customers' demands. This is only worth mentioning because there was such a huge marketing push behind the company's launch of its new, smoother Pike Place Roast brew back in April. The company premiered the roast with free sampling and by offering it in new (and somewhat controversial) cups.

Additionally, Pike Place was outlined as one of SBUX's turnaround initiatives to improve the customer's coffee experience. After launching Pike Place, SBUX had stopped brewing a second roast in the afternoon so the company will now resume brewing an additional bolder coffee along with it.

Although SBUX also stated that overall [Pike Place] has had impressive success, this customer demand for more of the familiar, bolder roasts might signal that Pike Place is not providing the sales lift management had hoped for. We will learn more about Pike Place's initial performance when the company reports it 3Q08 results as the brand was only launched at the beginning of the quarter. On a more positive note, it is impressive to see such a quick response on the part of management to meet its customers' requests, which is reflective of the company's renewed customer focus.

US Market Levees That Need To Hold Here...

On Wednesday, I said I'd be scared if I were you...

Here are the levels to watch:

1. The SP500 level i issued wednesday, 1322
2. The VIX, breaking out through 22.21
3. The US Dollar Index breaking the 73.04 line

Gold works today. So does cash. Manage risk; this is not a time to take it.
KM

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EYE ON POPULISM: Would this Vote Have Gone This Way Under the Employee Free Choice Act ?

At Research Edge we have our Eye on a potential Union comeback in this country. In a close vote, security guards at MGM's Mandalay Bay in Las Vegas voted against the International Union of Security, Police and Fire Professionals of America. Of course, consistent with our democratic traditions, the vote was conducted through the secret ballot. Obama and a majority in Congress have indicated they would pass the Employee Free Choice Act which would effectively replace the secret ballot with an open petition. My view is that union elections become less free under this measure and in this case the vote would've been radically different.

Todd Jordan
Managing Director
Gaming/Lodging/Leisure

Gaming and Taxes: The Never Ending Battle

Boom or bust, State governments will continue to pump water from the spring, in this case extract tax dollars from their favorite well: the casino industry. There is a battle raging in Nevada on how to close the growing budget gap. The Teachers Union originally proposed a large increase in the gaming tax but compromised with some casino companies to offer an increase in the hotel tax. Terry Lanni, MGM CEO, opposes an increase in the hotel or gaming tax and suggested raising the payroll tax among other measures. Get used to this folks. Unfortunately, most state governments were unwilling to curtail spending growth during the most recent economic boon. With receipts likely going lower in many states, governments will need to find more revenue. We've watched this sitcom before and it's not very funny. If the gaming industry is already paying its fair share , its share is likely to get fairer. Whether it's Nevada, New Jersey, or the riverboat markets, someone's taxes are going higher. There is a break in the clouds, however. New markets are born out of the economic bust periods due to, you guessed it, the quest for new tax revenue sources.

MEAN MARGIN MEAN REVERSION: A LITTLE LV CONTEXT FROM AN OLD ANALYST

First the good news: Las Vegas property level EBITDA margins have expanded 10 out of the last 15 years and were 4% higher in 2007 than the average over that period. The bad news: Mean Reversion is probably rearing its inevitable head. Why are we concerned about mean reversion? The impressive margin expansion was driven primarily by the hotel and the food and beverage product lines (casino margin has been stable) which should contract first and most dramatically as consumer spending slows and probably recedes. The following chart clearly shows the relevant trends.

In 2007, rooms and F&B contributed 40% of revenues and 38% of total departmental profits in Las Vegas, big contributors for sure. Room rates are already under pressure and casinos won't drop occupancy to hold rate. ADR's are the highest margin revenue source in Vegas. Do you see where I'm going? I'm not sure F&B traffic and pricing can hold up in this environment either. Restaurant traffic certainly hasn't across the country.

My partner Keith McCullough constantly reminds me that context is not just the last few years. Context in this case is at least 15 years. Unfortunately, when it comes to margin mean reversion, this context is not very comforting.

Todd Jordan
Managing Director
Gaming/Lodging/Leisure

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