The Year 2016 In Review: Las Vegas Sands Business Improved Aided by Increased Visitation In Macau

The year 2016 was a good one for Las Vegas Sands (NYSE: LVS), given the challenging environment that has existed in the Macau gaming industry over the past couple of years. While its revenue decline slowed in first half of the year, its EBITDA and revenue witnessed an increase in Q3’16 driven by increased visitation to Macau, stable growth in Las Vegas and the opening of its new casino The Parisian in Cotai strip. Sands China changed its strategy in Macau by shifting its focus from VIP to mass market gaming and diversifying its revenue streams with non-gambling attractions featured in its new casino. The company also started the expansion of its existing casino in Pennsylvania, but that will not be a significant contributor to company’s overall revenues. Although the Parisian has performed better than Wynn Resort’s Wynn Palace in the initial run, the long-term success of the casino will depend on the performance of the Macau casino industry in the coming quarters. We still remain optimistic about the Macau gaming industry and expect the market to continue its growth in the coming years.

Sands China revenue decline slowed down in 2016

Sands China revenues declined by about 30% in 2015, primarily due to corruption crackdown of Macau government. The decline, however, slowed in the first half of 2016 and in Q3’16, LVS overall revenues grew by 2.3% due to increased visitations in the region and the opening of LVS’s new casino The Parisian on the Cotai Strip. It is a significant improvement from last year, as the overall decline for LVS from the region stands at less than 10% for the first 9 months of 2016.  Macau contributes more than 50% to LVS’s overall revenues. This, added with an increased EBITDA margin from its China operations and its steady performance in Singapore and Las Vegas, contributed to a hefty 65% year-to-date increase in LVS stock price.

So what changed this year?We cite the following factors:  First, the decline of Macau gross gaming revenues slowed, driven by increased visitations and the opening of The Parisian and Wynn Palace. Second, LVS opened its new casino The Parisian in Q3’16, which performed better than Wynn’s new casino Wynn Palace so far. Third, LVS increased its operational efficiency and shifted its focus from VIP gaming to mass market gaming. On top of this, the Las Vegas market remained stable for LVS, despite the decline in other major casino markets, This includes Singapore, where decline was also less compared to the prior year.

The expansion of Sands Bethlehem will not be significant for Las Vegas Sands

After strong Q3’16 results, LVS announced $90 million expansion of its casino Sands Bethlehem. This expansion will add a new gaming floor with additional restaurant space, increasing the capacity of this casino and consequently generating higher revenues. However, the Pennsylvania casino accounts for only 3% of the company’s valuation and accounts for less than 10% of LVS’s overall revenues. Thus, although this move may increase slot handles in the region, the impact on company’s overall revenues will be insignificant.

Silver Lining: Macau visitations in Q4’16 beat our expectations     

We were bullish on Macau casino industry and expected it to rebound starting 2017. However, Macau GGR decline showed the first instance of monthly increase in August and by November, it witnessed double-digit growth. As the company’s Macau casino revenues accounted for about 65% of its overall casino revenues, there will be more upside to company’s stock price if Macau gaming industry continues its double-digit growth in 2017.

Overall, we believe that 2016 was a good year, given the challenging conditions in Macau over the last two years. And we expect LVS to continue its growth momentum in 2017.

We will follow up this analysis with the expectations for 2017, and how our valuation fits in that. Meanwhile, please let us know your views by commenting in the box below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of Las Vegas Sands

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