LVS: SANDS CHINA FAT COMMISSIONS CRIMP MARGINS

Despite a much higher Mass mix, Venetian’s margins are comparable to Wynn. High promotional activity is the culprit.

Wynn reported massive margins in Macau a few weeks ago which we discussed in our April 30th note, “WYNN GROWS INTO ITS MULTIPLE”.  A lot of the margin looks sustainable assuming Wynn continues to grow its direct VIP play and keeps its commissions low.  Unfortunately, we cannot say the same for the LVS Macau casinos.

Bottom line, Sands China is paying total commissions much higher than the “official” cap of 1.25% of rolling chip or 44% of win.  A fat commission structure explains why Venetian’s margins are in-line with Wynn Macau's despite Venetian generating a higher mix of higher margin Mass business and a greater percentage of VIP play than Wynn.  See the chart below for illustration.

LVS: SANDS CHINA FAT COMMISSIONS CRIMP MARGINS - WYNNVENETIAN

Sands China paid out aggregate commission dollars of 1.37% of RC in 1Q2010, 1.27% in 2009, and 1.31% in 2008 or 47%, 45% and 46%, respectively, if we look at commission as a % of win.  We define aggregate commission dollars as the sum of:

  • Rebates offered to direct players and the estimated monies paid to junkets that ultimately get paid back to junket customers as rebates.  This number can be calculated as the difference between calculated gross gaming revenues and reported net casino revenues. Rebates are recorded as a contra-revenue item.
    • For Sands, this amount is usually between 75bps to 100bps of VIP Turnover or 28-35% of VIP hold %.
  • Junket commission expenses are the part of the junket commission that the junket keeps in return for his service of providing credit, working capital, collection services and client promotion activity.  Junket commission expenses are reported in casino operating expenses by Sands China and broken out in the notes section of their releases.
    •  Junket commissions are estimated between 24-30bps for Sands China.
  • In addition to offering players rebates and paying junkets commissions for their services, operators also offer “comps” to their junkets and VIP players in the form of free rooms, free meals, free transportation (including those wonderful jet rides), and other forms of “entertainment.”  When we met with DJIC last year before commission caps were put in place, they told us that the caps were meant to capture the value of “comps” in the all-in rate.  Of course, they also intended to put a cap on revenue share deals, but that also never happened.  Regardless, complementary services have a cost to them and should be included in thinking about the cost of the VIP business.  Like rebates, complimentary non-gaming services are treated as a contra-revenue item.  When Sands China reports, non-gaming revenues are reported as net of “comped” revenues vs. when LVS reports the comps are in the promotional line.  To be fair, we reduce the promotional line by 50% in order to capture the true cost of the promotional instead of just the revenue forgone.
    • Gross comps are not insignificant;  they’ve been running between 19-30bps.

Even excluding the complimentary non-gaming services, commissions are higher than one would expect given the high percent of direct play across the 3 properties and the significant weight towards RC junkets vs. revenue share arrangements. Part of the explanation for higher all in commissions is that Sands pays a higher rebate rate to its direct players – perhaps closer to 1% not including comps.

  • 80% of Venetian’s VIP commissions are paid on a RC basis (i.e. 1.25%).  Venetian’s direct play as a % of total VIP Turnover was 21% in 1Q2010, 17% in 2009 and 15% in 2008.
  • 50% of Sands’s VIP commissions are paid on a RC basis.  Sands’s direct play as a % of total VIP Turnover was 10% in 1Q2010, 11% in 2009 and 2008.
  • 80% of Plaza’s VIP commissions are paid on a RC basis.  Plaza’s direct play as a % of total VIP Turnover was 43% in 1Q2010, 28% in 4Q2009 and 49% in 3Q2009.