Las Vegas Sands VIP Operations Hurt As Macau Gaming Continues To Slide For The Sixth Consecutive Month

Las Vegas Sands (NYSE:LVS) stock price has declined by more than 25% over the past six months, primarily due to a drop in gaming in Macau. Gaming revenues dropped by 20% for the month of November. ^[1] This is sixth consecutive monthly decline in Macau gaming. With the November decline, casino revenues are now flat as compared to the prior year and are poised to post the first yearly decline since 2002. The decline can be attributed to the government’s crackdown on corruption, which has led high rollers to stay away from the gaming tables. Moreover, tighter visa policies for Chinese travelling to Macau and new smoking restrictions at the casinos are adding to the woes. Macau VIP gaming contributes more than 15% to Las Vegas Sands’ stock value, according to our estimates. We are eager to see how VIP gaming trends in the coming months. Sheldon Adelson, CEO of Las Vegas Sands stated that the rebound in gaming might come after February of 2015. ^[2] Our current estimate for Macau VIP gaming gross revenues stands at $4.94 billion for 2014, representing a 2% decline over the previous year.

We have a $74 price estimate for Las Vegas Sands, which is about 35% ahead of the current market price. We project the company’s 2014 gross revenues at around $18 billion, with an adjusted EPS of $3.54. This compares to a consensus EPS estimate of around $3.57 according to Reuters.

Why Is Macau Gaming Down In 2014?

Las Vegas Sands has seen solid growth in VIP gaming over the past few years, with revenues growing 4 times between 2007 and 2013. An estimated EBITDA margin of 23% for Macau operations (not specific to VIP gaming) in 2013 translated into EBITDA of around $1.15 billion in 2013. While the surge in Macau gaming has been solid over the past few years, 2014 has been tough for all the casino players operating in Macau. Casino revenues in Macau declined by 23.2% in October, marking the largest decline in Macau gaming on record. ^[3] The November decline of 19.7% erased all the gains made in the first half of the year. Las Vegas Sands, like other casino operators, is facing the heat from this decline and its VIP gaming volume fell 19% in the September quarter. ^[4] The primary reason for this drop is the government’s anti corruption crackdown. 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. A new smoking ban in casinos is also hurting the casino operators, as it has reduced the playing time. While it is difficult to assess how long VIPs will stay away from Macau, the casino operators believe that it is a temporary phase and will eventually change as gambling in China is an accepted practice in the home as well as in social circles.  Old traditions cannot be changed in few months and people will return on gaming tables after any signs of slowing crackdown.

Our Forecast s And Estimates

While the gaming situation in Macau may be fragile in the near term, we expect casinos to do well in the long run.  It must be noted that Macau is the only place in China where gambling is legal. China is seeing growth in the number of HNIs (high net worth individuals), but only a small portion of them visits Macau for gambling. China currently has about 1.3 million HNIs with a combined wealth of $4.3 trillion. ^[5] As China continues to grow, more people will likely visit Macau for gaming activities and Las Vegas Sands should thus continue to benefit from the rising demand as it did in the past. Moreover, the Parisian resort will further enhance its capacity in the region. Accordingly, we estimate casino revenues from the VIP segment to be north of $7 billion by the end of our forecast period. An estimated EBITDA margin of 23% will translate into EBITDA of close to $1.7 billion by 2021.

1. Macau November gambling revenue falls 20 pct, sixth drop in row, Reuters, Dec 1, 2014 [↩]
2. Las Vegas Sands’ (LVS) CEO Sheldon Adelson on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 16, 2014 [↩]
3. Macau Gambling Revenue Falls 23% in October, The Wall Street Journal, Nov 4, 2014 [↩]
4. Las Vegas Sands’ SEC Filings [↩]
5. Understanding the High Net Worth Market in China, Accenture [↩]