Las Vegas Sands Posts Better Than Expected Q3 Results Amid Cost Effeciencies

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Las Vegas Sands (NYSE:LVS) recently reported its Q3 2015 earnings, which came in better than most of the street estimates amid cost efficiencies. The company outperformed the overall Macau market, which saw a 34% drop in gross gaming revenues during the third quarter. Las Vegas Sands also posted solid growth at its Singapore and U.S. properties. In Singapore, the company is seeing growth from nearby Asian economies, including Malaysia, Japan, Indonesia and Korea. Las Vegas Sands also increased its dividend for 2016 to $2.88 for full year or $0.72 per quarter. [1] Overall, the results were well-received by investors and the stock price is up 5% since the company announced its Q3 results.

Macau accounts for more than 55% of Las Vegas Sands’ value, according to our estimates, and this continued decline in gaming is a cause for concern. Having said that, most of the weakness in the Macau market is on the VIP front, especially on the junket side, while the mass-market gaming has been comparatively better. This is favorable for Las Vegas Sands, which has a higher profit reliance on mass gaming and non-gaming operations. We continue to believe that mass-market gaming will be the future growth driver for Las Vegas Sands in Macau, led by buoyant growth in China’s middle class, which will boost visitation from Mainland China to Macau. We currently have a $56 price estimate for Las Vegas Sands, which we will soon update to incorporate the recent quarter earnings.

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Cost Efficiencies Again Boosts Macau Q3 EBITDA Margins While Mass Market Will Drive Future Growth

A decline in Macau gaming led to 29% lower revenues and 33% drop in EBITDA for Sands China during the quarter. [2] However, the reported Macau EBITDA margins improved sequentially to 33%. Also, the company’s management stated that there is further room for margin expansion in future. On the VIP and premium mass front, the company is pushing for direct credit to some of its customers, thereby bypassing the junket route and improving its margins. While there is a risk involved in this, the company’s management stated that it is currently targeting only highly creditworthy customers with clean compliance records. [1]

Looking at the Macau market, it has been on a decline for 16 straight months led by the government’s anti-graft measures, followed by a weakening economy. In the first week of October, there were a few positive developments, such as increased tourist arrivals during the Golden Week and optimism for supportive measures from Beijing. However, the week following the Golden Week period saw weakness in the market and average daily gaming revenue fell to 5 year lows. [3] Such ups and downs have been noticed earlier in the year as well. There is not much to read in these figures as overall gaming revenues have remained stable for most of 2015 and base mass appears to be stabilizing. Many have been seeking catalysts that could bring in the much anticipated revival in Macau gaming. So far, the situation at best has been stable, which is not bad given the intensity of the fall the market has witnessed since the summer of 2014. Looking forward, the comparison will be favorable from Q1 2016 given this stability in gross gaming revenues sustains.

While we acknowledge that the Macau gaming market is seeing a massive decline in gaming volumes, at the same time, we believe that mass-market gaming will drive Las Vegas Sands’ growth in the coming years. Our bullish forecast can primarily be attributed to the growing middle class of China, which will likely fuel the Mainland China visitation to Macau. China’s GDP per capita is expected to grow to over $12,000 by 2020 as compared to $7,575 in 2014. [4] The Mainland China visitors to Macau are also on the rise and have grown from around 13 million in 2010 to over 21 million in 2014. [5] These factors will fuel mass-market gaming in the region. Looking at Las Vegas Sands, it will benefit from its diversified portfolio of properties and it is further developing The Parisian, a new casino resort in Cotai, primarily targeting the mass-market segment. The new property will further enhance Sands’ gaming tables capacity in the region. We currently estimate Las Vegas Sands’ Macau gross gaming revenues of over $12 billion and EBITDA of around $4.5 billion by 2022, representing 55% of the company-wide EBITDA.

Solid Performance At Singapore On A Constant Currency Basis

Las Vegas Sands’ Singapore casino revenues were up 2% to $585 million in the third quarter. While the rolling chip volume grew 25%, non-rolling chip volume was down 6%. Looking at hold percentage, non-rolling chip win percentage was higher at 27% as compared to 25.6% seen in the prior year period. [2] Overall, Singapore EBITDA was up 10% to $390 million. However, it was up 22% on a constant currency basis. The company in its earnings conference call stated that the Singapore market is not heavily dependent on China. That is why it did well despite a slowdown in Macau, reflecting growth from other Asian countries, including Korea and Japan. [1] We don’t expect any significant growth in the company’s Singapore operations in the near term primarily due to currency issues. We currently estimate Singapore revenues (excluding food, convention and others) to remain stable at around $3 billion and EBITDA of $1.5 billion in 2015, representing around 30% of the company-wide EBITDA.


Notes:
  1. Las Vegas Sands’ (LVS) on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, Oct 21, 2015 [] [] []
  2. Las Vegas Sands’ SEC Filings [] []
  3. Golden Week rally not sustained in Macau: analysts, GGR Asia, Oct 20, 2015 []
  4. China’s GDP per capita to exceed $12,000 by 2020: report, ECNS Wire, May 19, 2015 []
  5. Visitor Arrivals, Macau Government Tourist Office []