The Past, Present and Future of Las Vegas Sands
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Gambling giant Las Vegas Sands (NYSE: LVS) is a perfect story stock. Once battered to the brink of bankruptcy, Las Vegas Sands fell from $140 to less than $2 per share in a mere two years. But just as the market left the company for dead, CEO Sheldon Adelson’s big bets in Macau -- the “Las Vegas of the East” -- paid off handsomely.
The story of Las Vegas Sands can be split into three chapters: the past, the present and the future. Each chapter takes place in a different location, and gives investors an insight into the evolution of the company, from a domestic casino operator into an international entertainment powerhouse.
The Past: America
Las Vegas Sands’ past is buried in Las Vegas, the birthplace of modern commercialized gambling. Although Las Vegas was once the company’s primary market, its significance has waned, now accounting for less than 18% of its total revenue. Las Vegas casinos recently posted a surprising 2.5% recovery in gambling revenue, which slightly moved the needle for Sands’ Vegas properties. But those grand casinos -- the Venetian and the Palazzo -- are fairly insignificant sources of revenue. In the fourth quarter, those two properties posted a 31% slide to $308.3 million.
Sands also operates a casino resort in Bethlehem, Pa. -- an oddball property that nonetheless grew revenue by 15% in 2012.
The Present: Asia
Today, only one major market moves Las Vegas Sands -- Asia. Its two primary Asian markets -- Macau and Singapore -- generate more than 80% of its annual revenue. Sands also has a major edge over its rivals -- it is the only Western casino operator allowed in Singapore.
Let’s compare how much Macau’s business has helped Las Vegas Sands, Wynn Resorts (NASDAQ: WYNN) and MGM Resorts (NYSE: MGM) over the past five years.
|% of Revenue from Asia||Number of Asian Properties||5-year Revenue Growth||5-year EBITDA Growth||5-year Return on Investment|
|Las Vegas Sands||
(23% from Singapore)
|Wynn Resorts||69% (Macau)||2||82.07%||115.8%||150%|
|MGM Resorts||33% (Macau)||1 (51% joint venture)||19.85%||-56.45%||-133.1%|
Sources: Wikipedia, quarterly reports, Yahoo Finance, author’s calculations
It’s clear that increased exposure to Macau over the past five years is synonymous with explosive growth, with Las Vegas Sands being the primary beneficiary.
Macau -- a special administrative district of China where gambling is legal -- once experienced double-digit revenue growth. Macau generates roughly six times the annual gambling revenue of Las Vegas, and has been the target market for major Western casino companies. Last year, the former Portuguese colony generated $38 billion in annual gambling revenues.
However, Macau’s market is maturing and Chinese growth is slowing. In January, gambling revenue in Macau rose only 7.3% over the previous year. Analysts had forecast 10% to 12% growth. Last December, visits to Macau declined 2% year-on-year.
Another major concern in Macau is the decline of high-rolling VIP gamblers. These affluent customers, which contribute the majority of Macau’s gambling revenue, have steadily reduced their bets over the past 12 months. Casino operators have attempted to offset declining VIP bets by raising the minimum bets on the VIP tables.
For the fourth quarter of 2012, Las Vegas Sands’ seven Macau properties generated $1.97 billion in revenue -- a 48% increase from the previous year. Its Sands Cotai Central hotel, which opened last year, is its most recent addition. The company is expanding aggressively into the Cotai district, the new area where its flagship Venetian is located. The company’s newest project, the Parisian, will be completed in 2015 and will resemble a more extravagant version of Caesars Entertainment’s Paris Las Vegas hotel.
Las Vegas Sands also recently received government approval to add 200 gambling tables to its resorts, which boosts Sands’ total tables by 15% to 1,350 in Macau. Analysts believe that this increased room capacity could generate more than $500 million in additional annual revenue.
Higher room and table capacities still make Las Vegas Sands the strongest foreign casino operator, despite the regional slowdown. Macau's growth still outperformed its Singapore property, the Marina Bay Sands, which reported an 11% slowdown in revenue.
A Wild Card: Chinese Government Intervention
Analysts have always wondered how far the Chinese government would let Macau’s gambling business grow before it began cracking down on the region’s vice-fueled profits. That question was recently answered, after the Chinese government announced that it plans to start a crackdown on casino junket operators, special services that cater to Chinese VIP gamblers, arrange credit, and collect debts.
The effort was spearheaded by Chinese president-in-waiting Xi Jinping, as part of a sweeping anti-corruption campaign. The investigations are scheduled to start after Chinese New Year, which ends on Feb. 17. Chinese authorities believe the junkets, which ferry the VIP gamblers from China to Macau, help siphon illegal funds out of the country.
Although this crackdown is not aimed directly at the casinos, which are legal licensed businesses, the intervention is a wild card that has kept investors away from the gambling industry.
The Future: Adelson’s European Legacy
Although Sands currently depends completely on Asia, the company’s final frontier is Europe - where no company dares to expand due to the unending negative feedback cycle of the sovereign debt crisis. Adelson’s multibillion-dollar “EuroVegas” casino resort was recently approved for construction in Alcorcon, Spain, a suburb of Madrid.
EuroVegas will be the size of 750 football fields, consist of 12 hotels, six casinos, three golf courses, a convention center, theaters, shopping malls and restaurants. It will cost an estimated $29.5 billion. Will Alcorcon be the next Macau? If Spain, which suffers from 26% unemployment and one of the worst debt levels in Europe, can recover within the next two decades, then it very well could be.
The Bottom Line
Las Vegas Sands is still the best of the breed in the casino industry. Sheldon Adelson had the foresight to divest from Las Vegas and expand into Macau and Singapore long before his rivals did, and shareholders have been well rewarded.
Today, many people still doubt the sustainability of its Asian business and the viability of the company’s ambitious plans in Europe.
However, if the company's past decisions are any indication of the company’s future growth potential, then the stock, trading at 17.5 times forward earnings with a 5-year PEG ratio of 1.5 at the time of this writing, is a bargain at today's prices.
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