Continued Decline In Macau Gaming Will Weigh Over Las Vegas Sands’ Q1 Earnings

Las Vegas Sands (NYSE:LVS) will report its Q1 2015 earnings on April 22nd. We expect the casino giant to continue to face headwinds from the ongoing decline in Macau gaming. Macau gross gaming revenue fell by 37% in the first quarter amid the government’s crackdown on corruption, leading to the tenth straight month of decline. ^[1] Its not just VIP gaming that is facing headwinds, mass-market gaming revenues also declined around 27% in the first quarter. ^[2] Accordingly, we expect Las Vegas Sands to post lower revenues as compared to the prior year period and the shift of VIP gaming tables to mass-market gaming to continue. Looking at the company’s Singapore operations, we expect a slight uptick in revenues due to 2.1% growth in the economy during the first quarter. ^[3] However, it will be interesting to see how the Singapore rolling chip win percentage trends during the quarter. Note that the win percentage came in at 3.41% in the prior year quarter. This was much higher than 2.51% seen in Q1 2013, and it aided the 10% jump in Singapore EBITDA for Q1 2014. ^[4]

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 6% year to date. We currently estimate the 2015 EPS to be around $3.52 and maintain a $69 price estimate for Las Vegas Sands, which we will update after the first quarter earnings announcement.

Macau Revenues Will Decline In Q1 While Macau Government’s Visitor Cap Proposal Poses A Threat To Mass-Market Gaming

Macau casinos continued to face headwinds from declining volumes. 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. Also, Beijing wants Macau to diversify its economy, largely dependent on gambling, which accounts for 80% of the local government revenues.

Moreover, Macau government recently proposed to limit the number of Mainland China visitors. It must be noted that Mainland Chinese visitors have fueled the mass-market gaming growth and any restriction there can further hit the gaming industry. Chinese visitors currently account for 68% of the total visitation in Macau while international visitors make up the rest. The government wants to increase international visitation but not Mainland China visitors. Macau has a capacity of receiving around 90,000 visitors per day but that number peaked to 147,000 during Chinese New Year. This is much more than the city’s capacity and can affect the quality of life of residents, according to Institute for Tourism Studies. ^[5] It must also be noted that Las Vegas Sands derives most of its profits from mass-market gaming in Macau.

Las Vegas Sands largely relies on mass-market gaming and 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 52% in the previous quarter. ^[4] We estimate that mass-market gaming contributes close to 35% to Las Vegas Sands’ value. The company saw 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 over $2 billion in 2011 to a little under $5 billion in 2014. Mass-market gaming is also the largest contributor to the company’s overall profits due to higher margins. Since there are no junket operators involved in mass-market gaming, the margins are much higher than in VIP gaming. However, we currently estimate EBITDA margins for overall Macau operations and 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. It is developing a new casino project, The Parisian, in the region. However, if the recent proposal of limiting the number of Mainland Chinese visitors is implemented, it will adversely effect the Las Vegas Sands’ gaming operations in Macau. We will be looking for any comment from the company’s management on this front during the earnings conference call.

1. Macau Casino Bonds Slump as Xi Preaches to Wynn on Diversifying, Bloomberg, Apr 9, 2015 [↩]
2. Mass-market Macau GGR falls 27 pct in 1Q 2015: govt, GGR Asia, Apr 17, 2015 [↩]
3. Singapore tops growth forecast, MAS stands pat, CNBC, Apr 13, 2015 [↩]
4. Las Vegas Sands’ SEC Filings [↩] [↩]
5. Macau Aims To Cap Visitors From China, April Gaming Revenue Could Fall 40%, Barrons, Apr 14, 2015 [↩]