Las Vegas Sands kicked off the gaming industry’s fourth quarter earnings report season. So, what did we learn from LVS that may be applicable to other companies, as well as specific to it?
- Las Vegas. LVS is basically an Asian casino operator headquartered in Las Vegas. Less than 8 percent of its EBITDA comes from Las Vegas. Almost all the rest comes from Macau and Singapore.
It is likely that Asian percentage will grow as LVS opens $2.2 billion Londoner, St. Regis and Four Seasons renovations and expansions in Macau starting next year.
Yet, one of the most interesting observations that came from the company’s earnings report and outlook into 2019 is Las Vegas.
COO Rob Goldstein noted on the company’s investor conference call following its earnings release that business, including group business, is strong in Las Vegas this year.
Given that we’re now into 2019 that report on business trends bodes well for other companies, especially those for whom the Las Vegas Strip is important, namely MGM Resorts, and to a lesser extent, Caesars.
- VIP junket play. LVS to its core is a mass-market company. Its properties boast arenas, convention facilities, and over-sized rooms designed for business travelers. Yet the company is gaining market share in the Macau VIP business.
Rolling chip volume during the quarter rose 17.1 percent. That’s pretty impressive in a market where VIP growth has slowed and is expected to turn negative this year.
- Massive potential of the mass-market. LVS makes the case that its huge number of hotel rooms in Macau – more than 12,000 – give it a commensurately huge competitive advantage in a market that often is at capacity.
More important, LVS is converting many rooms into suites to accommodate the growing number of affluent Chinese in what is called the premium-mass segment.
While that reduces room inventory by some amount, it also increases revenue. The Parisian in Macau is an example of the impact of such a conversion. In the fourth quarter, its table game win per unit jumped 51 percent to $13,696 a day.
LVS expects similar results from adding 660 suites at St. Regis and Four Seasons and in converting mid-market Cotai Central into upscale Londoner.
Those results bode well for other Macau operators, perhaps most especially Melco Resorts whose City of Dreams and Studio City are aimed directly at premium mass.
Macau boosters, LVS among them, point to the vast untapped potential in Mainland China. The gaming participation rate in neighboring Guangdong province is 9.4 percent. All the rest of China is just 1.2 percent. That is a lot of potential to be fulfilled, especially when combined with the pure growth of the size of China’s affluent population.
The new bridge connecting to the Mainland and Hong Kong is expected to facilitate access to Macau from China proper and the Pacific Rim generally.
- Singapore, aka Trees Do Not Grow To The Sky. If there was something of a down note for LVS in the fourth quarter, it was Singapore, where EBITDA declined 20.8 percent thanks to lower VIP play and win percentage.
LVS is at capacity in Singapore and Goldstein, in the conference call, used the word frustrated several times to describe the situation there, and expressed hope the company will someday be authorized to expand.
But Singapore remains a huge positive. It contributed $362 million in property EBITDA in the quarter at a 49.9 percent margin. Scratch out the name Las Vegas Sands and present those numbers to an investor and ask if he would sink his money into a company that generates that level of profitability and the answer would be an instant “Heck, yeah.”
Further, Singapore in an indirect way might contribute significantly to growth. It is frequently held up as the model of what an integrated casino resort can be and, thus, is one reason cited why LVS might be a favorite to win a Japanese casino license.
- Interest rates matter. A combination of interest rates on new debt and rising US and global interest rates brought weighted average borrowing costs up to 4.5 percent from 3.4 percent.
As has been noted in this space before, the casino industry is capital intensive and companies carry significant debt. And, while companies generally have done a good job of managing debt, rising interest rates will have an effect.
