A Decline In Macau Gaming Will Weigh Over Las Vegas Sands’ Q3 Earnings

Las Vegas Sands (NYSE:LVS) will report its Q3 2014 earnings on October 15th. We expect the casino giant to face headwinds from the recent decline in Macau VIP gaming. However, the company should benefit from the strength in mass-market gaming, which continued to grow in the third quarter, albeit at a slower pace. It must be noted that, overall, Macau casino revenues declined by more than 7% for the third quarter, primarily due to a decline in VIP gaming amid the ongoing crackdown on corruption in China. ^[1]

We don’t expect any significant growth in the company’s Singapore operations. Singapore’s tourist arrivals have declined by 2.5% for the first seven months of 2014. ^[2] The data for advance the third quarter gross domestic product (GDP) will be released on October 14th and it is expected to be a positive 2.7% as compared to the prior year period and slightly higher than 2.4% growth seen in the second quarter of 2014. ^[3] We are eager to see how these trends weigh on gaming revenues in Singapore and if the region benefits from the decline in Macau.

A Decline In Macau Gaming Will Weigh Over Las Vegas Sands Earnings

In June 2014, Macau’s casino market witnessed a decline for the first time in five years. The world’s largest gambling hub extended the decline in the following months through September. While the revenues declined by around 3.7% in June and July, it was far worse in the following months with declines of 6.1% and 11.7% for August and September respectively. ^[4] This can be attributed to the Chinese government’s anti-corruption crackdown, which kept VIP players away from Macau. A wave of high-profile arrests of senior Chinese officials is hurting the VIP business of Macau casinos. Moreover, the government imposed visa transit restrictions, which has shortened the duration of visitors’ stay in Macau to five days, and imposed greater penalties for non-compliance.

While it is difficult to assess how long the gaming will suffer in Macau, Sheldon Adelson, Chariman and CEO of Las Vegas Sands, said that gambling might recover in two months time. ^[5] We estimate that VIP gaming contributes close to 20% to Las Vegas Sands’ value. The company saw the potential growth in mass-market gaming and has been busy expanding in that segment over the past few years. It further scaled up its mass-gaming operations in Macau after the first decline in June 2014. By the end of the second quarter, it reduced VIP table capacity by 28% and increased mass tables by 14%. ^[6] This is a good move since mass-market gaming, as compared to VIP gaming, is performing much better in Macau. The VIP gaming declined by as much as 25% in September and mass-market gaming grew around 8% to 10%. ^[7] While this is much lower than the 15% growth seen in July and August, it has managed to offset some of the declines in VIP gaming. Moreover, mass-market gaming offers much higher margins to the casino operators. For instance Las Vegas Sands mass-market gaming contributes more than 50% to the overall profits in Macau while the contribution from VIP side is only 17%. ^[8] We continue to believe that Macau mass-market gaming operations will drive growth for Las Vegas Sands in the long run.  The company will benefit from its diverse properties in the region, primarily Cotai, which has been growing rapidly and has captured some of the mass-market and VIP gaming share of the peninsula.

We estimate gross revenues of about $18 billion for Las Vegas Sands in 2014, with EPS of $3.61, which is in line with the market consensus of $3.31-$3.98, compiled by Thomson Reuters. We currently have a $78 price estimate for Las Vegas Sands, which is more than 25% ahead of the current market price. The stock price has fallen by approximately 20% since the company last reported its earnings. Casino stocks corrected after the continued decline in Macau gaming in the following months.