Earnings Preview: A Continued Decline In Macau Gaming Will Weigh Over Las Vegas Sands’ Q4 Earnings

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Las Vegas Sands (NYSE:LVS) will report its Q4 2014 earnings on January 28th. We expect the casino giant to face headwinds from the recent decline in Macau gaming. Macau gross gaming revenue fell by 25% in the fourth quarter amid the government’s crackdown on corruption, leading to seven straight months of declines that peaked in December with a 30% decline. Its not just VIP gaming that is facing the headwinds, mass-market gaming revenues also declined somewhere between 13% to 19% in December. [1] Accordingly, we expect Las Vegas Sands to post lower revenues as compared to the prior year period and continued shift of VIP gaming tables to mass market gaming.

Looking at the company’s Singapore operations, we don’t expect any significant growth due to a decline in international visitors and a little growth in the economy. Singapore’s tourist arrivals have declined by 3.4% through November 2014. [2] The fourth quarter gross domestic product (GDP) is expected to grow between 1.6% and 2.0% as compared to the prior year period. [3] We are eager to see how these trends weigh on Las Vegas Sands’ gaming revenues. An uptick has been anticipated for months and yet we wonder when the company sees gaming growth return in Macau. Meanwhile, Las Vegas Sands’ stock price has declined by 10% over the past three months. We currently estimate the 2014 EPS to be around $3.54 and maintain a $74 price estimate for Las Vegas Sands, which we will update after the fourth quarter earnings announcement.

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Las Vegas Sands Will See Headwinds From A Continued Decline In Macau Gaming Revenues

2014 marked as the first full year decline in Macau gross gaming revenues, which were down a little under 3%. [1] The primary reason for this drop is the government’s anti corruption crackdown. A wave of high-profile arrests of senior Chinese officials has hurt the VIP business of Macau casinos. Visa transit restrictions and a smoking ban added to the woes for casino operators in the region. Moreover, Beijing wants Macau to diversify its economy, largely dependent on gambling, which accounted for 80% of the local government revenues in 2013. While there is increased scrutiny over VIP gaming at present, it is for good and should help the industry in the long run, according to a research note by Union Gaming published yesterday. [4]

While the gaming situation in Macau may be fragile in the near term, we expect casinos to do well in the long run given that Macau is the only place in China where gambling is legal. Also, gambling in China is an accepted practice in the home as well as in social circles. 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 as well as other casino operators should thus continue to benefit from the rising demand as they did in the past.

Las Vegas Sands largely relies on mass-market gaming and it has scaled up its mass-gaming operations in the region. VIP gaming accounted for only 16% of Macau profits while mass-market gaming contribution was around 53% in the previous quarter. [6] We estimate that the mass market gaming contributes close to 35% 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. The segment revenues have grown from a little under $1.50 billion in 2009 to over $4 billion in 2013. Mass-market gaming is also the largest contributor the company’s overall profits, due to its higher margins, and it contributes more than 50% to the overall profits in Macau. 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.

Notes:
  1. Macau Faces Losses in Mass Market Gaming Revenue, Casino News Daily, January 3, 2015 [] []
  2. International Visitor Arrivals Statistics, Singapore Tourism Board, January 8, 2015 []
  3. Quick takes: Singapore Q4 GDP seen revised upwards on better-than-expected Dec factory output, Business Times, January 26, 2015 []
  4. Get back in to Macau names: Union Gaming, GGR Asia, January 26, 2015 []
  5. Understanding the High Net Worth Market in China, Accenture []
  6. Las Vegas Sands’ (LVS) CEO Sheldon Adelson on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 16, 2014 []