The Macau VIP segment for LVS has not been keeping up with the market. Some of this is deliberate, most of it is not.
Macau market Rolling Chip (RC) volume increased a whopping 76% y-o-y in April. LVS, on the other hand, could only muster a 10% increase in RC. The Venetian actually experienced a 23% decline in RC but pulled a rabbit out of its hat in the form of high hold % (and maybe higher direct play) to increase VIP revenue 22%. Even in Q1, LVS failed to keep up. Market-wide RC grew 75% in Q1 while LVS and Venetian only expanded 29% and 11%, respectively.
The chart below shows the pretty consistent erosion in LVS RC market share since December of 2008.
So what’s going on? Here are some thoughts:
- SJM market share push – We first highlighted this on 02/08/2010 in our note, “MACAU: A MARKET SHARE BATTLEFIELD?.” SJM embarked on an aggressive market share push with many of its properties and rooms on 5% franchise structure which is very attractive to the junkets. Moreover, the company has targeted the LVS junkets. SJM has been on a steady market share climb since September 2008, increasing its RC market share 1,400bps to a 2 ½ year high of almost 35% in April.
- City of Dreams commission hike – Despite a 1.25% commission cap agreement with The Venetian, we are hearing that CoD is actually paying many of its junkets a higher rate.
- Triads – I thought these guys went away peacefully when Macau opened up the casino industry. Yeah right. The media attention lately on LVS alleged ties with a Triad backed junket does not go over well with regulators. If LVS is pretty smart, and I think they are, they will be very careful to pull away from any even remotely shady junket. I don’t think those junkets necessarily want the attention either and they may distance themselves from the American operators. Look for Wynn and LVS to continue to experience VIP share degradation.
- CoD addition to the market – This is partly to blame for LVS’ RC share loss but only a small part. CoD garners only about 8% of the market and a lot of that comes from MPEL’s own Altira property.
- Shift to Four Seasons – Four Seasons is on a ramp but since inception, that property has only generated about 17% of the VIP turnover as Venetian.
- More direct play – Here is the positive take away from the bunch. The Venetian has absolutely been trying to cultivate this business. With player rebates in the 0.77%-1.05% range (or 28-34% of the table hold rate) versus junket commissions of 1.25%, direct play is much higher margin. The chart below shows direct play as a percentage of RC for Venetian and Sands. Clearly, Venetian is on the upswing and that is deliberate. Higher direct play will usually eat into VIP but the net will be a positive because of the higher margin.
LVS has clearly stated that it intends to be primarily a non-junket Macau operator. Over the long-term that should be a positive and we are quite constructive on the long-term competitive positioning of LVS. However, LVS currently remains very reliant on VIP. In 2009, we estimate 48% and 39% of Venetian Macau’s net table revenues and table profits, respectively, were generated from VIP. When market VIP growth slows – we think post May – near-term investor growth expectations may have to be ratcheted down for LVS.