Las Vegas Sands (NYSE:LVS) has seen strong growth in Macau driven by increased VIP and mass-market gaming activities. In addition, the company is developing a $2.5 billion resort on the Cotai strip, which will further enhance its capacity in the region. Gambling revenues in Macau rose by 15% in the first half of 2013, despite slower GDP growth in China. 
We expect this trend to continue due to the growing number of high net worth individuals (HNIs) in the region as well as gaming becoming a bigger part of the country’s culture. Gaming operators Las Vegas Sands and Sociedade de Jogos de Macau (SJM) predicted that Macau’s gaming revenue would reach somewhere in the vicinity of $80-$100 billion by 2020, as Macau’s market is currently reaching to a very small percentage of China’s total population. Las Vegas Sands in particular is poised to benefit from the growth in Macau as it has established a critical mass with its diverse properties and resorts. Unlike MGM Resorts (NYSE:MGM) and Wynn Resorts (NASDAQ:WYNN), Las Vegas Sands is well diversified in different regions. It operates casinos in Las Vegas, Pennsylvania, Singapore and Macau. In light of the recent quarterly performance and the development of new properties in Macau, we have revised the Trefis price estimate for Las Vegas Sands to $57.
- Las Vegas Sands Q4 Earnings Bolstered By Cost Efficiencies
- Las Vegas Sands Likely Outperformed Macau Market In Q4, Led By Mass-Market And Non-Gaming Operations
- Casino Operations At The Strip Hold Little Value For Las Vegas Sands
- Las Vegas Sands’ Singapore Gaming Likely To See Steady Growth In The Coming Years
- Las Vegas Sands Posts Better Than Expected Q3 Results Amid Cost Effeciencies
- Continued Headwinds At Macau Will Weigh Over Las Vegas Sands’ Q3 Performance
Macau Is Burning Hot
Growth In Economy
Macau is the only place in China where gambling is legal and its economy has been growing strong. Macau’s GDP in 2012 was up 10%, which was slower than 21.9% growth recorded in 2011 and 27.5% in 2010.  However, its per capita GDP has remained in the top 10 of world’s around 190 economies. For the first quarter of 2013, GDP in Macao expanded 10.8%. The strong economy will directly translate into higher revenues for the casino operators. Las Vegas Sands in particular will benefit from its vast presence in Macau with multiple properties such as The Venetian, Four Seasons, Sands Macao and Cotai Central.
Macau And Las Vegas Sands’ Performance So Far
In 2012, total gaming revenues were in the region were $38.5 billion.  Last month, Macau’s gambling revenues rose 20% to $3.7 billion boosted by an increase in the number of Chinese visitors.  In the recently filed quarterly earnings, Las Vegas Sands’ Macau revenues witnessed a jump of 40% to record $2.07 billion.  The company’s Macau properties attracted more than 14 million visitors during the quarter.  While Macau’s gaming revenues were up 15% in Q2 2013, Las Vegas Sands witnessed a 26% increase in gaming revenues due to its diverse properties and resorts, which is aiding its growth. Sheldon Adelson recently pointed out that the macro view about China is not affecting Macau and that consumer behavior is going in the right direction as there are more people coming in and spending more money. With increased visits, we expect the Macau operations to continue to drive growth for the company.
Development Of Cotai Central And The Parisian
Las Vegas Sands is busy expanding its presence in Macau and added Cotai Central to its portfolio in 2012. Cotai Central is being developed in phases. The property opened phases I and IIA in April and September 2012, respectively, and phase IIB on January 28, 2013. The property will be fully operational by 2015. Upon completion, Sands Cotai Central will consist of a 13.7 million-square-foot 6,400-room integrated resort complex featuring around 460 table games and 2,200 slot machines, approximately 800,000 square feet of retail, entertainment and dining space, over 550,000 square feet of meeting facilities and a multipurpose theater.
The company also announced development of another property called The Parisian, which will have replicas of Paris landmarks, including a half-scale Eiffel Tower. The property will have more than 3,000 rooms and suites, 450 table games and 2,500 slot machines. The property will cost around $2.5 billion and is being funded with $1.5 billion in bank loans and around $1 billion in cash. Both of the new properties will significantly enhance the company’s current capacity in Macau.
We expect Las Vegas Sands’ revenues to more than double by the end of our forecast period primarily due to the surge in Macau gambling and the development of new resorts, which will boost the company’s current capacity in the region. The company currently enjoys close to 20% market share in China.  Even if we assume the lower end of the market forecast given by the company’s management and if the market share remains at similar levels given that Wynn Resorts and MGM Resorts are also expanding in the region, we arrive at casino revenues of $16 billion. According to our estimates, Macau casino and hotel business constitutes roughly 60% of the company’s value. Macau’s casino market is divided into two segments – VIP Table Games and Mass Market Games, which generated $4.2 and $2.5 billion, respectively, in 2012. Taking into account the factors discussed above, we have increased the growth forecast for the coming years. For 2013, we expect revenues from Macau VIP Table Games to be around $5.2 billion and $3.4 billion from Mass Market Games. We further forecast revenues from VIP Games to reach almost $10 billion and that from Mass Market Games to reach close to $7 billion in the next six years. On the similar grounds, we have also raised our estimates for Las Vegas Sands’ total number of rooms available in Macau as the capacity will enhance to more than 11,000 by 2016, when the new resort will be opened.
Risks To Our Estimates
Chinese Government’s Crackdown On Junket Operators
VIP gaming accounts for 67% of the gambling revenues generated in Macau. The demand from VIP gamblers is volatile and more vulnerable to changes in China’s tightening credit policies and the country’s periodic crackdowns on corruption. Earlier this year, a news report suggested that China’s government will start taking action to clamp down on junket operators that bring gamblers from the mainland to Macau.  The junket operators act as middlemen and moneylenders that drive VIP segment, and any crackdown on these operators will impact the VIP gaming business.Notes:
- Macau Gambling Revenue up 21% on Year in June at MOP28.27 Bln, The Wall Street Journal, Jul 1, 2013 [↩]
- Gross Domestic Product, Government of Macao Special Administrative Region Statistics and Census Service [↩]
- Macau gaming revenues grow in 2012, hit record $38 billion, Review Journal, Jan 2, 2013 [↩]
- Macau rakes in 20 pct gain in July gaming revenues, Reuters, Aug 1, 2013 [↩]
- Las Vegas Sands’ SEC Filings [↩]
- Las Vegas Sands Corp. (LVS) CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, Jul 24, 2013 [↩]
- Sands China Enjoys Upper Hand In Macau Gaming Boom, Investor’s Business Daily, Jul 29, 2013 [↩]
- Macau Casinos Decline After Report on Junket Crackdown, Bloomberg, Feb 6, 2013 [↩]