What Factors Can Drive Growth For Las Vegas Sands’ Macau Hotel Operations?

Las Vegas Sands’ (NYSE:LVS) Macau hotel operations have benefited from higher gaming demand in the past, and this has led to better occupancy levels across its properties over the past few years. Casino operators are motivated to sustain occupancy in order to generate demand for casinos and other ancillary facilities, thereby sometimes compromising the average daily rates (ADRs). Las Vegas Sands has grown its occupancy rate over the past few years and it has further upside potential, which will be triggered with a rebound in Macau gaming. Las Vegas Sands should now focus on growing ADR at a faster pace, in our view. While we believe that the ADR will trend downwards in the near term due to a slowdown in Macau gaming, we expect it to grow north of pre-recession levels by the end of the decade. This growth will be led by an increased capacity and higher demand for gaming. Better-than-expected growth in the company’s Macau hotel operations could further add incremental revenues of more than $500 million over our current forecast. This could trigger a 5% upside to the stock, in our estimation.

Sands’ ADR In Macau Has Declined Due To Opening of New Properties

We estimate that the Macau hotel business contributes around 10% to Las Vegas Sands’ stock value. The hotel operations are driven by ADR and occupancy levels. Sands’ overall Macau ADR has declined from $279 in 2008 to $232 in 2014. This can be attributed to opening of new properties, such as Cotai Central, which led to a drop in overall ADR. Each hotel property has different ADRs and an addition of a property with lower rates will drag the overall average rates down. For instance, Sands’ overall Macau ADR dropped 15% in 2012 as it opened Cotai Central with an ADR of $155. This compares with an ADR of $237 for Venetian Macau during the same period. ^[1] Usually, ADR growth for a property is largely dependent on the hotel’s occupancy levels as it is the demand that weighs on the pricing of the rooms. Apart from casino guests, the hotel sales team is focused on bringing in a defined number of room nights through various events and shows.

Las Vegas Sands has been able to maintain occupancy levels of over 85% in the past few years. This can be attributed to multiple factors. Firstly, the company has a diversified portfolio of properties, which includes luxury segment, such as Four Seasons Macau, as well as upscale segment, such as The Venetian Macau. On the other hand, Wynn for example has currently only one property operational in Macau and it has established a premium casino resort image. This is why its ADR of $333 is much higher than that of $232 for Las Vegas Sands. Also, there has been significant growth in the number of visitors to Macau, increasing from less than 25 million in 2010 to over 31 million in 2014. ^[2] This has fueled demand for rooms in the region. In fact, Las Vegas Sands is currently considering building a non-casino hotel property in Macau to cater to the high room demand. Also, with an exception of 2014-2015, Macau has seen stellar gaming growth. We believe that the gaming demand will rise in the coming years and that will translate into higher occupancy levels as well as ADR for the hotel properties (see – What Factors Can Drive Las Vegas Sands’ Stock Price?).

Limited Room Supply

The current room supply is unable to meet the demand in the region, especially on weekends and holidays. Overall occupancy rates for Macau stood around 91% last year, according to the Macau Hotel Association. This is a high figure by international standards and suggests that the region can absorb a significant increase in room supply in the coming years. There were around 28,000 rooms in Macau by the end of last year, while there are another 26,000 under development or pending approval with the government. ^[3] Las Vegas Sands is currently developing its new casino resort in Cotai, which will increase its capacity by around 3,000 rooms in the region by 2017.  We believe this will be fully absorbed given the demand for rooms in Macau.

Our Near Term And Long Term Forecasts

Macau gaming market has been going through a downturn over past 15 months amid an anti-corruption crackdown, a weakening economy and slower growth in China. As a result, gaming volume has seen a massive decline. This has also weighed on the ADR and occupancy levels of hotels in the region, evident from casino operators’ earnings releases in the past couple of quarters. Accordingly, we estimate the ADR as well as the occupancy rate to take a mid-single-digit hit in 2015.  However, we believe it will recover thereafter, led by an expected rebound in gaming, along with continued growth in Mainland China visitors to Macau, and Las Vegas Sands’ increased capacity with the opening of The Parisian.

In the long run, we estimate the ADR to grow to the $300 level and occupancy levels to be around 90% by the end of our forecast period. This will translate into hotel revenues of over $1 billion and an estimated EBITDA margin of 70% for Macau Hotels, will translate into EBITDA of $765 million, representing 10% of the company-wide EBITDA. However, if the ADR and occupancy levels see higher than expected growth, driven by a steeper rebound in gaming, it would translate into a 5% potential upside to our price estimate for Las Vegas Sands. Here, we assume the ADR to grow towards $400 and occupancy levels to grow to 95% (also see – Wynn Resorts: What Happens If Recovery In Macau Gaming Comes Sooner?).

1. Las Vegas Sands’ SEC Filings [↩]
2. Visitor Arrivals, Macau Government Tourist Office [↩]
3. Macau hotel room supply to double, GGR Asia, Mar 2, 2015 [↩]