MACAU COMMISSION ADVANCES

Higher commission rates are only part of the more competitive VIP environment.

We are pleased investors are finally focused on the increasing competition for Macau junkets.  Wynn’s market share was ripe for the taking as Four Seasons recently figured out.  MGM’s strategy has been clear for months and MPEL has been very aggressive on the VIP side for a few months.  Higher commissions are only part of the story.

With a huge book of junket business, the lowest junket commissions in Macau, and a conservative credit issuance policy, Wynn’s VIP business remains vulnerable.  We’ve been making that call for months.  The other call we’ve been making is MPEL and MGM gaining share.  With these guys, it’s not just about aggressive commissions.

Both MGM and MPEL may be advancing commissions to junkets for up to 3-4 months versus the former standard 15-30 days.  Wynn advances commissions to junkets in the beginning of each month for roughly 30 days. We're hearing that even Venetian has moved up to 2 months recently.  Market share data for September will again show strong market shares from MGM (despite low hold) and MPEL and weak share for Wynn (partly due to low hold); so clearly junket credit matters.  It may start to matter enough for Wynn.  We believe Wynn may be considering a more aggressive junket strategy for the first time to offset the competitive onslaught.

The sell side has finally figured out that the environment has gotten more competitive.  They’ve focused only on higher commission rates.  That may certainly impact margins so the explosive VIP growth is not all good news.  We are starting to worry a bit that a credit bubble could be forming.  Current volumes may be unsustainable.  How long can the operators continue to provide this duration of liquidity?  What happens when a junket can’t pay?  We’re not sure this level of credit is sustainable.

Over the near term, the credit bubble is still building.  Volumes will remain strong as long as liquidity remains.  Even though MPEL has been an aggressor, the stock remains the one with the most near term upside, in our opinion.  The good news for near-term investors in MPEL is that it appears to be driving VIP through commission advancement rather than further hikes in commission rates.  Near term margins will look better under this scenario and the company should finally be able to put up estimate beating quarters until the credit dries up.