Is Las Vegas Sands Better Off Without Junkets?

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Is Las Vegas Sands Better Off Without Junkets?


The Singapore government recently issued licenses to two junket operators, both of which happen to be agents of Las Vegas Sands' (NYSE: LVS ) rival Genting Singapore. Does this spell bad news for Sands?

In the gambling haven of Macau, premium or VIP customers account for nearly three-quarters of the total gambling revenue, which highlights the significance of junkets. But, in Singapore, it's a different roulette game altogether.

Junkets: a primer
In the junket system, operators are like middlemen who drive high-net-worth players (read: people with loads of money to blow) to the casinos. They provide credit to these high rollers for an agreed-upon commission, which is usually pretty significant, from the casinos. The casinos encourage junkets because they help drive volume and also keep credit risk and default rates down.

Some observers say the junket licensing deal in Singapore is an unfortunate blow to the profitability of Marina Bay Sands, the Singapore property that accounted for a significant 31% of Las Vegas Sands' revenue in 2011. So with two junket operators newly licensed to competition, is LVS truly in a disadvantageous position?

Caveats to the doom theory
I don't think so. Sure, these junkets may bring in more business for Genting, but that's not enough to pull Marina Bay Sands down. Here are two reasons why:

1. Junket operators may find Singapore restrictive, given its rigid oversight and licensing rules. For one thing, the Singapore government won't permit profit sharing with other non-Singapore-licensed junkets. The fact that only two licenses have been issued, and will be heavily regulated, could make for smaller profits compared with Macau operators.

2. Unlike peers Melco Crown Entertainment (Nasdaq: MPEL ) and Wynn Resorts (NYSE: WYNN ) , which prefer to focus on the VIP segment, Sands China operates in the mass-market area -- in part because the huge junket commission costs attached to the VIP segment drags down margins. And this mass-market policy has worked in Sands' favor. In 2011, LVS reported net margin of 16.6%, Wynn 11.6%, and Melco 7.7%.

A Foolish conclusion
Sands' performance in Singapore has been quite good so far without junkets. In the quarter that ended in December, Marina Bay Sands reported EBITDA of $427 million, higher than Genting's $307 million. I don't see junket operators negatively affecting Las Vegas Sands in a big way, but I am keeping a close eye on the developments. If you'd like to do the same, add Las Vegas Sands to your free Watchlist!

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