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Las Vegas Sands Holds Cash In Macau Gambling Getaway
By: Investor's Business Daily
Call it the luck of the big draw.
Las Vegas Sands ( LVS ) began betting nearly a decade ago that Macau could be the world's next gambling center.
Already a cornerstone company in the buildout of the Las Vegas Strip, Sands has hit the jackpot again in Macau, the only place in China where gambling is legal.
Through business skill and good fortune, Sands has helped make Macau the world's top gambling destination. It has long outpaced Las Vegas.
Sands is one of the biggest players in the gambling haven, where it owns properties through its 70.2% stake in Sands China Ltd.
Las Vegas Sands properties on Macau include the Venetian Macao, Sands Macao, the Plaza Macao and its most recent Sands Cotai Central, opened in April 2012.
The firm owns and runs the Marina Bay Sands resort in Singapore.
Back in the U.S., Sands owns the Venetian Las Vegas and Palazzo resorts, and the Sands Expo And Convention Center -- all in Las Vegas. But it gets the bulk of its top and bottom lines from Macau.
Despite the slowdown in China's economy, business has been booming in Macau, as members of the country's fast-growing middle class continue to flock to the gambling haven. Macau gaming revenue rose 17.6% in August, according to the Macau Gaming Inspection and Coordination Bureau.
Las Vegas Sands has been cashing in on Macau's good fortune. Strong gaming volumes in the former Portuguese colony fueled winning results in the second quarter. Earnings surged 48% to 65 cents a share, ending four quarters of declining or flat earnings. Revenue climbed 26% to $3.24 billion. Consolidated adjusted property EBITDA, a key measure of operating performance, was up 31% to $1.1 billion.
Cotai Strip Draws Crowds
In Macau, Sands saw more than 14 million visitors to its properties on the Cotai Strip. Adjusted property EBITDA surged 53.2% to $657.2 million. Its mass table win in Macau was up 61.1% to $930 million.
Las Vegas Sands has been winning in Macau on a few fronts as it benefits from the growth of higher-margin mass-market gamblers flocking to the region from China and a surge in its hotel room capacity at a time when room supply in Macau is tight and demand is high.
The company has seen a surge in its hotel room capacity over the past year or so with the completion of the first two phases of the Sands Cotai Central. The integrated resort complex features rooms and suites under the Sheraton, Conrad and Holiday Inn brands. In all, the complex has added close to 6,000 new rooms to Las Vegas Sands' capacity.
The property includes approximately 300,000 square feet of gaming space with approximately 460 table games and 2,200 slot machines; roughly 800,000 square feet of retail, entertainment and dining space; and more than 550,000 square feet of meeting facilities and a multipurpose theater.
"We are big believers that supply drives demand growth in the market, and the Sands Cotai Central, with almost 6,000 rooms, is the largest hotel complex in Macau," said Telsey Advisory Group analyst Christopher Jones. "Their competition does not have the same kind of supply it's had over the last 12 months."
The expansion comes at a time when room supply is tight, and operators with the greatest room counts have a competitive advantage over those with insufficient hotel supply, Jones noted in a report.
That supply is particularly important at a time when mass-market demand for accommodations is growing. While growth has slowed among VIP customers over the past year, China's huge numbers of middle-class gamblers are helping to pick up the slack.
"There's been a move to mass-market gaming, which is more in line with what you see in Las Vegas," said Jones. "And it's more profitable for the casinos."
The mass market is more lucrative for casino operators because they don't have to pay VIP junket operators to bring in middle-class customers. Junket operators serve as middlemen for the casinos, drawing high rollers with free rooms, travel and other perks.
"The VIPs either come to Macau and get credit extensions from the operator directly or through a junket," adds Susquehanna Financial Group analyst Rachael Rothman. "The mass-market person is someone who comes to the casino without any credit extension and comes to gamble."
Mass-market gaming fetches higher EBITDA margins -- in the 30% to 40% range vs. the mid-teens for VIP gaming, Jones says.
In the second quarter, the company saw strong growth and operating momentum in Macau, said CEO Sheldon Adelson in a statement.
The Venetian Macao kept up strong visitor and financial performance. Adjusted property EBITDA rose 57.5% to $360.9 million.
Following The Money
What happens in Vegas doesn't always stay in Vegas. That's the case with Las Vegas Sands. Jones estimates Las Vegas is less than 7% of Las Vegas Sands' overall earnings.
He says the overall climate in Las Vegas is getting better, but not on the gaming front. There's been an acceleration in nongaming revenue, with the most improvement in hotel room spending.
July gambling revenue in Nevada totaled $926 million, down 8% from a year ago, according to the Gaming Control Board. On the Las Vegas Strip, gaming revenue fell 14.4% and downtown Vegas revenue slipped 9.7%.
The company has plans for more development in Macau. The Parisian Macao, a fifth integrated resort property on the Cotai Strip and its sixth in Macau overall, is under construction. Based on the current construction schedule and subject to timely government approvals, it's targeting the opening for late 2015.
Analysts polled by Thomson Reuters expect full-year earnings to rise 35% to $2.88 a share. They forecast a 17% gain in 2014.
"Continued and accelerated and strong performance in the mass-market segment coupled with the benefits from the opening of Cotai Central were the strongest elements in the second quarter," Jones said. "As that continues to ramp up it will continue to drive momentum for the next couple of quarters."
Rothman says the company's strategy is to grow assets, but "unfortunately" there aren't many new jurisdictions that are legalizing gambling.
"Sure they'd like to see places like Japan or Spain or Thailand move forward with legalizing gambling, but there's little movement on those fronts," she said. "It's a company that's been a growth company for so many years that's transitioning to a same-store, cash-flow company, and that's a difficult transition for stocks to make."
Las Vegas Sands is the largest company in IBD's Leisure-Gaming/Equipment industry group, which just moved up to No. 7 among 197 groups that IBD tracks. The next largest components areMelco Crown Entertainment ( MPEL ),Wynn Resorts ( WYNN ),MGM Resorts ( MGM ) andInternational Game Technology ( IGT ). Sands gets a highest-possible Composite Rating of 99 from IBD, as do two other companies in the group:Century Casinos (CNTY) andSHFL Entertainment (SHFL).