How Will The Decline In Macau Gaming Impact Las Vegas Sands?

by Trefis Team
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Las Vegas Sands (NYSE:LVS) stock price has declined by more than 5% over the past week due to a drop in gaming in Macau. Gaming revenues dropped by 6% for the month of August. [1] This is third consecutive monthly decline in Macau gaming. While the region has witnessed a decline in gaming over the past few months, it is still up 8% for the year so far. Earlier in June, the increased betting on sports led to lower gambling in Macau. Moreover, the Chinese government’s anti-corruption crackdown added to the woes and VIP players stayed away from Macau. Further in July, the government imposed visa transit restrictions that contributed to the decline in gaming.

Macau VIP gaming contributes more than 20% to Las Vegas Sands’ stock value, according to our estimates. We are eager to see how VIP gaming trends in the coming months. Our current estimate for Macau VIP gaming gross revenues stands at $5.29 billion for 2014, representing 5% growth over the previous year.

VIP Gaming Has Been Growing Strongly Over The Past Few Years

Macau VIP gaming has been trending well for Las Vegas Sands over the past few years. The rolling chip volume has surged from $43.4 billion in 2007 to close to $178 billion in 2013. [2] However, casino hold percentage for VIP gaming is usually lower at around 2.8%, translating into revenues of over $5 billion in 2013. Using our estimated EBITDA margin of 23% (for the Macau casino) suggests into EBITDA of $1.15 billion for 2013. The company has been able to attract more customers through its diverse portfolio of properties in the region. The company recently opened Sands Cotai Central, which is doing well for the company and we expect it to generate annual EBITDA of over $1 billion from its mix of VIP and mass market gaming. The company is developing another casino resort in Cotai, which will increase its market share in the region. The new resort will be operational by 2016.

What Has Led To A Decline In VIP Gaming In 2014?

While the surge in Macau gaming has been spectacular over the past few years, 2014 has so far been tough for all the casino operators. An increased betting on FIFA World Cup led to a decline in VIP gaming in the second quarter. Average table revenue dropped from HK$801 to HK$775 million per day after the World Cup kicked off. [3] Casino revenues in Macau declined by 3.7% to $3.4 billion for the month of June. This was the first time in five years that the revenues declined in Macau. July also witnessed a dip of 3.6% while the decline in August was far worse with 6% drop in gross gaming revenues. The primary reason for this drop is the government’s anti corruption crackdown. A wave of high-profile arrests of senior Chinese officials is hurting the VIP business of Macau casinos. Moreover, the government imposed visa transit restrictions, which has shortened the duration of visitors’ stay in Macau to five days, and imposed greater penalties for non-compliance. While it is difficult to assess how long VIPs will stay away from Macau, Nomura in one of its notes stated that MGM China and Sands China do not expect a rebound in VIP gaming for rest of the year. [4]

Our Forecast For VIP Gaming

While the gaming situation in Macau may be fragile in the near term, we expect casinos to do well in the long run.  It must be noted that Macau is the only place in China where gambling is legal. 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 should thus continue to benefit from the rising demand as it did in the past. Moreover, Cotai resort will further enhance its capacity in the region. Accordingly, we estimate casino revenues from VIP side to be north of $7.5 billion by the end of our forecast period. An estimated EBITDA margin of 30% will translate into EBITDA of close to $2.5 billion by 2021.

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Notes:
  1. Monthly Gross Revenue from Games of Fortune, Gaming Inspection And Coordination Bureau Macau, As of Sept. 2014 []
  2. Las Vegas Sands’ SEC Filings []
  3. Macau casinos feel heat of World Cup fever as gamblers bet elsewhere, South China Morning Post, Jul 1, 2014 []
  4. No lift in Macau VIP this year say MGM, Sands: Nomura, GGR Asia, Sep 4, 2014 []
  5. Understanding the High Net Worth Market in China, Accenture []
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