When Las Vegas Sands reported third quarter earnings on the 15th, it not only kicked off the quarterly earnings season, it kicked off the earnings season for the nine publicly traded Macau casino enterprises.
(By nine, we mean the three American-based casino operators, their three Hong Kong-traded subsidiaries, and the three pure Hong Kong-list Macau casino operators.)
It also kicked-started a fresh debate on Macau.
On the surface, LVS earnings were a mixed bag. EBITDA crept up 0.6 percent though revenues actually declined. And on the company’s subsequent conference call, CEO Sheldon Adelson and global gaming operations chief Rob Goldstein admitted that increasing competition for Macau’s premium mass-market players had crimped EBITDA margins.
And there were other cautions, like what Adelson called the need for clarification on the national Chinese government’s crackdown on gambling by government officials that is one of the reasons given for the decline in VIP play.
Investors, however, definitely saw a glass half-full. LVS stock shot up 6.18 percent the following day, taking fellow Las Vegas-based Macau operators Wynn up 4.45 percent and MGM Resorts up 4.85 percent in sympathy.
And that on a day the overall market declined.
The reasons for the stock surges were plentiful:
• Adelson suggested Macau revenue growth will resume early next year.
• He reported no effect so far from the just-imposed smoking ban.
• The Chinese government, he reiterated, is supportive of Macau.
• Just plain relief that the world isn’t coming to an end made the modest growth in EBITDA as welcome to investors as the big double-digit growth of recent years.
And LVS certainly provided reasons of its own, such as a 30 percent dividend increase, its second $2 billion share repurchase, strong growth in non-gaming revenues.
Adelson also expressed his firm conviction that Macau is supply-driven, thus new properties coming online should grow the market.
Plus his company’s devotion to the integrated resort model on a scale competitors won’t match gives it a sustainable advantage as new markets open, Adelson insisted bullishly.
Of all those reasons, the one that strikes us as the most important is whether Macau is a supply driven market.
Just months ago, investors saw only a rosy future for Macau, and returns on the prospect of adding 4,300 more table games in six new mega resorts in Cotai were each penciled out as though the market was limitless.
Then, growth slowed. Then the VIP market fell through the floor, overwhelming mass-market growth. Then the mass-market slowed.
The result was an erosion of confidence that brought down stock prices.
Suddenly, those six new mega resorts started to look more dangerous than enriching as investors worried about bringing such huge new capacity into a declining, or at least slowing, market.
Adelson, however, did not become one of the several richest people in the world by sounding an uncertain trumpet.
Indeed, he pointed out in the call, he was the inventor of the integrated resort, and he followed through and succeeded by developing those resorts with critical mass.
That, he said, will prove true again in Macau, the supply driven market.
Ebola Scare
The scare over ebola will, hopefully, be short-lived, but what if it isn’t? What if more cases arise, including among airline passengers?
We’ve seen other instances where contagious diseases have scared travelers into not traveling: SARS in Hong Kong in 2003 and Avian flu in 2006. Then there was the terrorism scare following 9/11 in 2001.
The initial reaction in such scares is to short airline stocks or play LEAPs on travel-related stocks, such as casino resort companies.
Yet each of those scares created long-term buying opportunities for those who preferred being long stocks.
We suspect any ebola scare could produce a similar pattern.
