Las Vegas Sands Rethinks Macau VIP Strategy
Monday, February 14, 2011 by ARSITEKTUR
HONG KONG—Las Vegas Sands Corp.'s Macau unit is taking a second look at how it markets itself to high rollers after last week dismissing its chief executive, Steve Jacobs, who was a key proponent of direct marketing to clients.Sands China Ltd., lauded by many analysts for its aggressive strategy of improving profit margins by cutting out middle men known as junkets to bring big spenders to its casinos, will "study the economics" of using intermediaries to bolster business versus marketing directly to VIP players, the company's newly appointed acting chief executive, Mike Leven, told Dow Jones Newswires on Thursday.
"It will be a number of months before we come to a conclusion," said Mr. Leven, who is also chief operating officer at Las Vegas Sands. Sands China is Macau's second-biggest casino operator by market share after Stanley Ho's SJM Holdings Ltd.
Las Vegas Sands's decision to re-examine its strategy in Macau comes amid a whirlwind of change at the Hong Kong-listed unit that has seen its chief executive depart amid rising tensions with Chairman Sheldon Adelson, as well as the appointments of two top executives in less than a week, all while the company struggles to restart a stalled $4 billion expansion project in Macau.
Mr. Adelson said on Las Vegas Sands' second quarter earnings call Wednesday that its Macau unit may pull back its efforts to drive the direct VIP business, despite analysts' estimates that the method is able to deliver double the margins of VIP business facilitated by junkets.
"We are in active discussion right now since we terminated Steve Jacobs about the wisdom of accentuating the effort for direct premium play," said Mr. Adelson.
Junkets, who bring high-spending gamblers to the casinos, issue them credit and collect on debts in exchange for commission. Although junkets do cut into casinos' margins, they are able to drive business volumes and reduce credit risk because they could be more familiar with their clients' financial standing, reducing the chances of bad debt, which is particularly troublesome to recover in China.
As gambling debt isn't recognized in China, there are no legal means for casinos to recover debts owed to them by Chinese players, which account for the majority of their customers.
Sands China has improved the margins on its earnings before interest, taxes, depreciation and amortization to 28.5% in the second quarter from 22.6% in the same period last year under Jacobs' leadership, demonstrating the company's "effort to cultivate the direct VIP business is time well spent," Citigroup analyst Anil Daswani said in a report Thursday.
But the casino operator's new management now wants to make sure its bold strategy to save on junket commission fees hasn't been the company's relationships with these intermediaries, long a powerful force for driving gambling revenue in Macau, the only place in China where casino gambling is legal.
Sands China wants to make sure it doesn't lose valuable junket business to competitors such as Wynn Resorts Ltd.'s Macau unit by alienating these middle men with its strategy, Mr. Adelson said on the call.
The company's strategy reappraisal highlights an evolving debate in Macau over the best way to drive business from high rollers, which have powered Macau's nearly 70% year-on-year growth in gross gambling revenue in the six months ended June 30. VIP play accounted for more than 70% of total revenue for the period, according to analysts.
There are currently 75 active junkets in Macau, the top five of which control about 80% of Macau's VIP market, CLSA analyst Huei Suen Ng said, citing industry sources.
Though Sands China's efforts to drive direct VIP play "should ideally help margins," the strategy could "result in higher balance sheet risk," Morgan Stanley analyst Praveen Choudhary said in a note Thursday.
There are also concerns casino operators can't match junkets' client sourcing abilities: "We all understand the margins are better with direct but the question is if the operator can keep growing that business," said Credit Suisse analyst Gabriel Chan.
Sands, though arguably the most aggressive proponent of driving direct VIP business, isn't the only operator to do so. Wynn Macau, for example, does pursue its own high-end customers, but not in large volumes, according to a person familiar with the situation.
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