China New Year Adds Upside To Wynn, Las Vegas Sands


Casino owners holding a big stake in gambling haven Macau had plenty of cause to uncork the champagne this Chinese New Year.

Macau, the only area of China where gambling is legal and the most important profit center for big casino operators, typically draws record crowds of tourists during the weeklong Lunar New Year holiday, which this year started Jan. 31.

For the first nine days of February, average daily table revenue (ADR) climbed 32% to $1.463 billion (Hong Kong dollars) over the peak ADR of $1.107 billion (Hong Kong dollars) during Chinese New Year 2013, said analyst Christopher Jones of Telsey Advisory Group.

"The environment in Macau continues to be robust," said Jones.

The New Year fervor continued through the month, according to channel checks by Sterne Agee analyst David Bain. Macau table-only gross gaming revenue totaled 30.33 billion Macau Patacas -- or about $4.2 billion (U.S.) -- through Feb. 23, he wrote in a note Tuesday. The February run-rate, with five days of gross gaming revenue to go, was about 42% year over year, or 38.4 billion Macau Patacas, which would top October's monthly record by more than 5%.

That's good news for the two biggest casino owners -- Las Vegas-basedLas Vegas Sands ( LVS )andWynn Resorts ( WYNN ).

Las Vegas Sands owns a portfolio of properties in Macau through its majority-owned subsidiary Sands China Ltd. It generates 60% of its overall EBITDA and revenue from Macau, according to Bain's estimates.

Wynn operates a casino hotel resort in Macau through its 72.3% owned Wynn Macau Ltd. It gets 67% of its total EBITDA and 66% of revenue from Macau.

A Populist Uprising

Both have been on a roll. And Macau's output through Feb. 23 prompted Bain to raise his Macau February gaming revenue forecast to a 35% gain vs. a year earlier from his prior range of a 26% to 28% increase.

The higher growth rate owes directly to the holiday, Bain told IBD. "It was a strong Chinese New Year, driven by mass patron visitation."

Jones agrees that Chinese New Year tends to be a more "mass market" event -- effectively involving midrange spenders. The higher-rolling VIP gamblers tend to "stay away from the crowd."

The growing mass market is more lucrative for Macau's casino operators because they don't have to pay junket operators to haul in customers. At the higher end, junket operators serve as middlemen, drawing more upscale gamblers with free rooms, travel discounts and other perks.

Bain says mass-market gamblers account for as much as 40% of Macau casino EBITDA vs. less than 18% for the VIP market. Income from the mass segment grew at a rate of 35% last year while VIP grew 13%, he says.

Companies weighted toward mass gaming, such as Las Vegas Sands, tended to gain market share during the New Year holiday, Bain said. According to his checks, through Feb. 16, Las Vegas Sands' table-only market share was an estimated 25.0%, up from about 21.8% in January.

More hotel rooms this year at Gongbei Border, a portion of Macau, benefited Chinese New Year and February results, says Bain. Another plus was the opening of Chimelong International Ocean Resort on Hengqin Island, which drew about 500,000 visitors in its first 10 days of business Jan. 28-Feb. 6.

Also beneficial: a "lack of distraction" from last year's mainland China leadership handover, which caused a "disruption to VIP visitation" at that time, he says.

For 2014, Bain forecasts total Macau gaming revenue to rise 14% vs. a year earlier to $51.5 billion.

"However, given continued checks on the Island citing fundamental strength in nearly all segments -- including mass, premium mass and VIP -- we believe our forecast may prove conservative," he said.

S&P Capital IQ analyst Tuna Amobi projects Macau gaming revenue will grow in the low double digits in 2014. That is down from an 18% gain in 2013 and the 42% rise in 2011, he says.

The Vegas Sun Also Rises

On the U.S. side, Jones says, "there's definitely the expectation that overall 2014 will be the best year and Q1 will be the best quarter in Vegas since the downturn."

That turnaround is likely to hinge on corporate meetings and conventions, he says.

Union Gaming Group analyst Robert Shore says he's "definitely bullish on the short-, intermediate and long-term outlooks for overall demand in Vegas."

Short term, the city is looking at a strong Consumer Electronics Association show in January. Then the ConExpo-Con/Agg construction industry show comes to the Las Vegas Convention Center in March. That "strong event and convention calendar" continues throughout this year, Shore said.

"Business convention guests tend to spend more throughout multiple channels, including restaurants, covers, rooms, and the night life segment," he said.

Into The Land of the Rising Sun

Meanwhile, Q4 results for Macau-driven Las Vegas Sands and Wynn were strong.

Las Vegas Sands posted a 33% rise in earnings for the quarter. Analysts polled by Thomson Reuters expect a 28% rise in Q1 EPS.

Jones says Q4 was "a mixed bag" for the company. The Macau business was "very strong" with record-high EBITDA margins.

The offset to Macau was its results in Singapore, where it saw a "volatile hold rate" on the VIP side. Sands' EBITDA came in around $100 million below expectations, he said.

But Singapore is not a "driving force" of the company, he says. He says growth is coming from Macau and other potential developments outside of Macau, such as Japan or South Korea.

Las Vegas Sands CEO Sheldon Adelson said last week he plans to expand into Japan if the nation OKs integrated casino resorts like those in Las Vegas and in Macau. He says he is willing to spend $10 billion now to start developing casinos there.

Many hurdles remain, but if legislators do vote this year to allow casinos, Bain said, the selection process for which operators will host the new casinos should begin next year. "LVS is one of the few front-runners to host a casino in Japan," he said.

The "real story" for Las Vegas Sands is that it continues to be a "strong grower," adds Jones.

"It will continue to drive earnings and returns to shareholders whether in the form of buybacks or dividend growth," he said.

Wynn's Macau Expansion

Wynn saw its Q4 earnings climb 94% to $2.27 a share.

Wynn reported better-than expected top-line and EBITDA results, besting analyst forecasts in both Macau and Las Vegas, Shore wrote.

Results in Las Vegas showed growth on both the hotel and casino segments, he added. But Macau was the growth driver, with revenue up 24.6% to $1.12 billion. Vegas revenue rose only 2.4% to $400 million.

Wynn is expanding in Macau, where it is building the Wynn Palace fully integrated resort on the Cotai Strip. The $4 billion project is set to open in 2016.

For both Wynn and Las Vegas Sands, Amobi says, "the fact that these companies are committing more capital to that market is a signal to their bullishness."

A Bullish Year Of The Horse

Jones is "upbeat" on the prospects for the casino group.

"We are continuing to see decent volume out of Macau," he said. "Saving any large geo macro event, I think we should continue to see strong gains coming from the Asian gaming sector."

Analyst Shore is "bullish" on the long-term for Macau, which he says will benefit from continued infrastructure improvements such as the expansion of the Barrier Gate and a new railway.

"There's also the benefit of GDP growth and currency appreciation," he said. "We're seeing more and more mainland Chinese becoming wealthier, and Macau is the only place in the mainland with legalized gambling. Macau is a gaming-oriented market with its patrons having a much higher propensity to gamble relative to Westerners."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: LVS , WYNN

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