Why Is The Cotai Vision A Boon For Las Vegas Sands?

Macau casino revenue surged 40% to a record $4.8 billion in February, after a jump in mainland Chinese visitors to the world’s largest gambling hub during the Chinese New Year. ^[1] More than 770,000 mainland Chinese visitors traveled to Macau during the new year holidays from Jan. 31 to Feb. 6, reflecting an increase of 23% from a year earlier, according to the Macau Government Tourist Office. ^[2]

This is great news for casino operators such as Las Vegas Sands (NYSE:LVS), which commands more than 20% market share in Macau. 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. ^[3] Las Vegas Sands in particular is poised to benefit from this growth in Macau as it has established a critical mass with its diverse properties and resorts.

Maybe it is too early to say, but it appears that the company’s bet on Cotai is paying off well. Cotai is a combination of the Coloane Island and Taipa Island names. Cotai was a marshy land between Taipa and Coloane, until Sheldon Adelson, chairman and CEO of Las Vegas Sands came up with a vision that coincided with the Macau government. The vision was to create a Strip like Las Vegas in Macau. Now Cotai is a popular area in Macau and is seeing rapid growth. We believe that Cotai will be the driving force for Macau gaming in the coming years. Overall Macau gaming will continue to grow 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.

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Las Vegas Sands Cotai Operations

Las Vegas Sands is busy expanding its presence in Macau and added Sands Cotai Central to its portfolio in 2012.. Within Macau, the company currently operates four properties – The Venetian Macao, Sands Macao, Sands Cotai Central, and The Four Seasons Macao. Sands Cotai Central is being developed in phases. The property opened phases I and IIA in April and September 2012, respectively, and phase IIB in January 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. ^[4]

The company is also developing another property in Cotai 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 and will be operational by early 2016. The Parisian 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. However, Las Vegas Sands is not the only one trying to make its presence felt in Cotai. Wynn Resorts (NASDAQ:WYNN) and MGM Resorts (NYSE:MGM) are also developing integrated resorts in the Cotai region.

How Did Cotai Properties Trend In 2013?

Las Vegas Sands’ overall casino revenues for 2013 climbed 26% or $2.38 billion compared to the prior year. The increase can be primarily attributed to a jump of $1.47 billion at Sands Cotai Central, due to its progressive opening. ^[4] These revenues were a result of high rolling as well as non-rolling chip volume. It must be noted that non-rolling chip win percentage was around 22.5%, which is lower than its majority of other properties and we believe there is a room for growth on this front. Similarly, rolling chip win percentage is also lower around 2.66% and should improve in the coming years.

The hotel at Sands Cotai Central witnessed 78.5% occupancy levels and REVPAR of $121. On the other hand, REVPAR at The Venetian Macao is $222, $318 at The Four Seasons Macao and $242 in Sands Macao. Similarly, the occupancy levels at these three properties in 2013 were 91.3%, 85.3% and 96.1% respectively. ^[4] Again, the hotel statistics are much lower at Sands Cotai Central than the company’s other properties in Macau and we believe this will pick up in the coming years as this property is relatively new.

Even if we assume the similar market forecast given by the company’s management, and if Las Vegas Sands’ market share remains at similar levels given that Wynn Resorts and MGM Resorts are also expanding in the region, we arrive at gross Macau casino revenues of over $12 billion for VIP gaming and over $9 billion for mass-market gaming by the end of our forecast period, which is more than double the current revenues.

What Can Stall This Growth?

However, our estimates are subject to certain risks. For the time being, Macau has been growing strongly despite headwinds in China’s growth story. China’s GDP in 2013 went up by 7.7%. While this was above the government’s official target of 7.5%, China’s economy is stagnating after recording revised 7.7% GDP growth in 2012 and 9.3% in 2011. Looking forward for 2014, the GDP growth rate may slow to 7.4%. ^[5] A slowdown in China may impact Macau gaming. although it has not yet. If there is a slowdown in growth in Macau’s gaming revenues, Las Vegas Sand’s growth will also be hurt.

Moreover, demand from VIP gamblers is also seen as volatile and vulnerable to the tightening of credit in China and the country’s periodic crackdowns on corruption. Over the past year, there were new regulations introduced in Macau that require junkets and casinos to report suspicious transactions and player lists each month. They should also report details of when the players played and how much they won or lost. In addition to this, Macau is set to implement a new money laundering law next year, which may allow authorities to freeze and seize assets. ^[6] The junket operators act as middlemen and moneylenders that drive VIP segment, which accounts for two-thirds of Macau gaming revenues, and any disruption there can adversely affect VIP gaming in Macau.

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1. Macau gambling revenue surges 40 percent in Feb, Reuters, Mar 2, 2014 [↩]
2. Visitor arrivals hit one million in Spring Festival Golden Week Year-on-year increase of 13%, Macau Government Tourist Office, February 7, 2014 [↩]
3. SJM & Sands CFOs optimistic about gaming revenue: “Safe forecast” – USD80-100 billion by 2020, Macau Daily Times, May 23, 2013 [↩]
4. Las Vegas Sands’ SEC Filings [↩] [↩] [↩]
5. China’s 7.7% GDP growth beats official target, CNN, Jan 20, 2014 [↩]
6. China’s Corruption Crackdown Is Forcing Macau To Overhaul Its Business Model, Business Insider, Nov 3, 2013 [↩]