Las Vegas Sands’ China Operations Decline After A Slowdown In Macau; Earnings Jump 28% Over Lower Costs

Las Vegas Sands (NYSE:LVS) recently reported its Q4 2014 earnings. A decline in Macau gaming weighed over the company’s performance and China revenues declined 16% to $2.12 billion. Macau EBITDA also declined 15% to $713 million. Las Vegas Sands’ consolidated revenue decreased 7% to $3.42 billion but earnings per share jumped 28% to $0.92 for the quarter due to lower costs. Singapore operations were strong in the fourth quarter with 27% jump in revenues and a 100% surge in EBITDA. ^[1]

VIP gaming accounted for only 16% of Macau profits while mass-market gaming contribution was around 52%. Given the recent decline in Macau gaming, the company has been shifting its tables to premium mass segment for the past few quarters. The premium mass tables increased to 323 in the fourth quarter of 2014 as compared to 261 in the prior year period. ^[2]

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.

2014 was tough for all the casino operators in Macau and it marked as the first full year of gross gaming revenue decline. 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, smoking ban and weakening economy 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. Las Vegas Sands has been focused on expanding its non-gaming operations such as retail space and it is well positioned to benefit from any growth in non-gaming activities. It must be noted that Las Vegas Sands currently gets 80% of all the non-gaming income out of 35 Casinos in Macau. ^[3]

While the situation in Macau may continue to be fragile over the next few months, we expect the casinos to do well in the medium to long run. As China continues to grow, more people are likely to visit Macau for gaming activities. Even in 2014 visitation from Mainland China to Macau was up 14% to 21 million. ^[3]

A Decline In Macau Gaming Hurts The Casino Operations Across The Properties

A decline in Macau gaming led to lower revenues for Las Vegas Sands during the quarter. The rolling chip volume was down 50% in Sands Cotai with a win percentage of 3.21%. Looking at the property’s mass gaming, volumes were up 11% but the win percentage was lower at 20.3% as compared to 22.7% in the prior year period. Despite the Macau decline, the company still managed to post a positive company-wide EBITDA due to lower operating costs, which were down 14%. ^[1] The casino giant has been consistently outperforming Macau’s overall gaming growth. Macau’s mass games win was down 16% for the quarter while Sands China saw a 9% decline. ^[2]

Las Vegas Sands has been able to establish a critical mass with its diverse portfolio of properties in the region and it is benefiting from the overall gaming growth, especially in the mass-market segment. 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. Our current revenue estimate for mass-market gaming stands at over $7 billion for 2016. The revenue boost will come from its new Cotai property, The Parisian, which is a $2.7 billion integrated resort and will offer more than 3,000 hotel rooms, 450 gaming tables and 2,500 slots.

Meanwhile, after a 30% plunge in gross gaming revenues in December, things are appearing to pick up in Macau. For the week ended January 25th, gaming picked up 7% over the prior week. However, it was still down 7% compared to the prior year period. ^[4] Overall, January may see a revenue decline of around 15%. Union Gaming Research in one of its recent note indicated that the casino stocks have bottomed out and the ‘New Macau’ with more scrutiny for VIP gaming is for good and will help the industry at large in the long run. ^[5]

Singapore Operations Rebound

Las Vegas Sands’ Singapore casino revenues were up 34% to $674 million in the fourth quarter. While the rolling chip volume declined 27% and non-rolling chip volume was down 3%, the rolling chip win percentage was very high at 3.58% as compared to 1.92% seen in the prior year period. Similarly, the non-rolling chip win percentage was also up 220 basis points to 26.7%. Overall Singapore revenues were up 27% to $839 million while EBITDA was up 100% to $519 million for the quarter. However, there was a $90 million benefit related to a property tax settlement. ^[1]

We don’t expect any significant growth in the company’s Singapore operations in the near term due to a decline in international visitors and a little growth in the Singapore economy. Singapore’s tourist arrivals have declined by 3.4% through November 2014 and the fourth quarter gross domestic product (GDP) is expected to grow around 1.6% as compared to the prior year period. ^[6] We estimate Singapore revenues (excluding food, convention and others) to be around $3.75 billion in 2015 and an estimated EBITDA margin of 41% will translate into an EBITDA of $1.53 billion, representing around 25% of the company-wide EBITDA. We currently have a $74 price estimate for Las Vegas Sands, which we will soon update to incorporate the recent quarterly earnings.

1. Las Vegas Sands’ SEC Filings [↩] [↩] [↩]
2. Las Vegas Sands’ Earnings Call Presentation [↩] [↩]
3. Las Vegas Sands’ (LVS) CEO Sheldon Adelson Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, Jan 29, 2015 [↩] [↩]
4. Some Of Wall Street Is Still Living In A Macau Fantasy Land, Business Insider, Jan 27, 2015 [↩]
5. Get back in to Macau names: Union Gaming, GGR Asia, January 26, 2015 [↩]
6. Quick takes: Singapore Q4 GDP seen revised upwards on better-than-expected Dec factory output, Business Times, January 26, 2015 [↩]