Las Vegas Sands (LVS) and Sands China (HK: 1928): 3Q13 earnings

the results

After the New York close yesterday, LVS announced 3Q13 results for itself and for its subsidiaries, Macau-based 1928 and wholly owned Marina Sands of Singapore.

Revenues for LVS came in at $3.57 billion, up 31.7% year on year.  EBITDA (earnings before interest, taxes, depreciation and amortization)  advanced by 45.5% yoy to $1.28 billion.  EPS was $.82, a 78.3% yoy increase.  That figure exceeded the Wall Street consensus by $.05.

During the quarter, LVS repurchased 4.6 million shares of its stock, at an average price of $65.18.  It says it will buy back a minimum of $75 million in stock a month from now on.

LVS also raised its quarterly dividend from $.35/share to $.50, giving a forward yield of 2.8%.

 

1928 rose by almost 10% in overnight trading in Hong Kong (in a market where other Macau casino stocks were up by 4%-5% or so).  LVS has barely budged in this morning’s pre-market trading.

 

the highlights

Macau

LVS is a convention hotel operator.  Its strength is catering to customers who have, say, $10,000 to gamble during a stay rather than VIPs with $1 million or more.  Its huge investment in hotel/casino capacity in the Cotai section of Macau on the conviction that if Sands built it, customers would come, is beginning to pay off royally now.

EBITDA for 1928 came in at $785.3 million for the quarter, up 61.7% yoy.

Singapore

Marina Bay’s EBITDA was $373.6 million, up 43.3% yoy.  However, the amount bet by VIP gamblers was only up by 16.9%.  The largest portion of the EBITDA increase comes from the casino “win” (the amount gamblers lose, which is what casinos count as revenue) bouncing back from an abnormally low 1.79% of the amount bet during 3Q12 to a more normal 2.85%.

US

Down a bit, yoy.  EBITDA in Las Vegas was $87.1 million (vs. $98.2 million during 3Q12).  Bethlehem, Pa brought in $29.6 million (vs. $32.1 million).

my take

At this point, over 90% of LVS’s EBITDA comes from Asia.  That percentage will continue to climb.

Marina Bay is an enigma to me.  …a good enigma, but a puzzle nonetheless.  It isn’t that long ago that Marina Bay and Macau were neck-and-neck in generation of cash for LVS.  But while Singapore has been relatively stagnant, LVS’s Macau EBITDA have doubled.  Has Marina Bay already topped out at $1.5 billion in annual EBITDA?  I find it hard to think this is the case, but I can’t see any evidence to the contrary from the financials.

Macau is booming   …and the market is rapidly developing a large resort/convention segment, which is LVS’s management specialty.

valuation

At today’s Hong Kong closing quote, LVS’s interest in Sands China is worth $49 billion.

If we make the (conservative, in my view) assumption that Marina Bay will generate about $1.5 billion in annual cash flow and that we’re willing to pay 10x for that, then the Singapore subsidiary is worth $15 billion.

The same calculation for the US operations (let’s put a cash flow multiple of 8 on it) would value it at about $4 billion.

Total value = $68 billion.  That compares with a total market cap for LVS at yesterday’s close of $58.5 billion.

If these back of the envelope figures are close to correct, LVS is trading at about a 15% discount to the sum of its parts.  Further upside could come from continuing flowering of the Macau operations, which I think is highly likely, and/or a return to growth for Marina Bay.  (I own the stock and am happy to remain a holder.  At some point, I’ll have to trim the position simply because of size, but see no present reason to do any other selling.)

 

 

Atlantic City gambling in 2013

the current situation

In 2006, Atlantic City casinos “won” $6 billion from gamblers there.

National GDP that year was $13.9 trillion.  This year the figure will be around 20% higher.  Using this change as a(n admittedly very crude) gauge for what gambling win for the New Jersey shore resort in 2013, AC should take in $7 billion+.

In actuality, aggregate casino win will be closer to $3 billion.  …and even that 50% haircut from seven years ago may be too high.

How so?

By far the biggest reason is that similar lower-end gambling establishments have been legalized in neighboring states, notably in Pennsylvania.  Why drive when you can get your entertainment in newer venues in Philadelphia, Bethlehem or Mt. Pocono?

The profit situation in AC is in all likelihood worse than that (filings with the Casino Control Commission would show how bad things have gotten, but I haven’t looked).  For reasons best known in Trenton, the New Jersey state government offered $300 million+ in subsidies to persuade foolhardy entrepreneurs to add new capacity into a declining market by opening Revel in 2011.  Already through bankruptcy once, that casino is still up and running in its newest incarnation.  All Revel has done has been to force all casino operators to pay out larger incentives to lure customers in.

At least one more shoe may be about to drop.  Governor Cuomo of New York has been persuaded (thanks to the Lim family of Malaysia?) that his state, too, needs more non-Native American, non-racetrack casino gambling and has been pushing for legislative action in Albany for a while.

how Trenton is responding to the decline

…after the Revel disaster, that is.

–most important, it’s launching online gambling in the state.  Borgata is the first casino to have the service–customers need not be on the casino premises, but must be physically located in New Jersey while they’re online.

–the state has tried to offer sports betting in the casinos, but its thumbs-down to sports books years ago when Federal enabling legislation was being written closed the door to this possibility

–it’s trying to persuade United to service the AC airport, dangling better treatment in its Newark terminals as an incentive, and,

–newspaper reports a while ago suggest the Casino Control Commission has been asked to reconsider its ban of Ho family ownership of casinos (although unless a Ho-related entity were going to buy and refurbish/rebuild an existing casino, I don’t see any positives here).

success = slowing the AC decline?

That’s the best I think Trenton can hope for.

what catches my eye

As an analyst, what gets my attention is the combination of large amount of effort Trenton is exerting, with apparent lack of any forethought.  AC is clearly important to Trenton, but I wonder why there’s so little effective action.

From a stock market point of view, Borgata will soon be giving us some practical insight into the effect of online gambling on casino operations.  Does it bring in new customers (a clear positive)?  does it increase the amount existing customers gamble with Borgata (another positive)?   or does it mostly substitute for visits to the physical casino (presumably a negative)?

Macau casinos, August 2013

Over the Labor Day weekend, the Macau Gaming Inspection and coordination Bureau (DICJ) released its monthly report on the aggregate amount won by the casinos in the SAR during the month.  Here are the figures:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue Accumulated Gross Revenue
2013 2012 Variance 2013 2012 Variance
Jan 26,864 25,040 +7.3% 26,864 25,040 +7.3%
Feb 27,084 24,286 +11.5% 53,948 49,325 +9.4%
Mar 31,336 24,989 +25.4% 85,284 74,314 +14.8%
Apr 28,305 25,003 +13.2% 113,589 99,317 +14.4%
May 29,589 26,078 +13.5% 143,178 125,395 +14.2%
Jun 28,269 23,334 +21.1% 171,447 148,729 +15.3%
Jul 29,485 24,579 +20.0% 200,932 173,308 +15.9%
Aug 30,737 26,136 +17.6% 231,670 199,444 +16.2%

Source: Macau DICJ

The figures are obviously good.  the MOP 30.7 billion achieved in August surpasses all but the win from last March, a holiday month.  They’re 4% better than the results for July.  They’re also up 17.6% year on year.  August of last year may have been negatively affected both by weather and by high rollers beginning to pull in their horns as the anti- conspicuous consumption attitude of the new Communist Party leadership began to make itself known.

What’s most interesting–and encouraging–are company comments that VIP gamblers are beginning to return in higher numbers to Macau as they feel more comfortable about what the Party’s anti-corruption stance and dislike of lavish displays of wealth actually means for them.  Apparently, gambling, in itself, isn’t a bad thing.  In addition, the tide of merely affluent gamblers–who might gamble US$10,000 on a visit, rather than US$1 million–is continuing to rise strongly.

The real shortage element at present is casino and hotel capacity to receive customers.  The biggest beneficiaries of market growth are those who are opening new space in Cotai.  To my mind, this means Galaxy Entertainment and Sands China (I own shares of  Galaxy and of Sands China’s parent, Las Vegas Sands.  (Both Fidelity and Schwab maintain Americans aren’t permitted to buy Sands China in Hong Kong and refuse to transact in the name.   I’ve asked LVS several times for an explanation–their investor relations people are clueless, however.  I find that disturbing for a big company, but not to the degree that I want to sell LVS.)

One’s instinct in any attractive market is to look for laggards–companies that may not be the best-positioned, but which are significantly cheaper than the leaders.  Buy them, wait for a run and trade into the leaders, the strategy goes.  In theory this sounds good.  And Hong Kongers have no trouble executing it among the Macau gambling stocks.  As for me, some of the laggards are controlled by people I don’t trust.  So I’d rather stick with the names I have (I also own Wynn Macau and WYNN).

Macau gambling: July 2013 results + other stuff (ii)

Last Friday I remarked that the strong year-on-year gains in casino “win” (the amount lost by gamblers, which is much smaller than the amount bet) for the SAR in July have to be taken with a grain of salt.  That’s because many Chinese gamblers decided to stay away from Macau during the run-up to the late 2012 leadership change in the Communist Party.  Why ask for trouble, they thought.

So far, August is shaping up as a clone of July.

On to the “other stuff” that I was too rushed to get to last week.

1. the economics of mass market vs. VIP

So far the story of gambling in the Macau SAR has been about high rollers playing baccarat.  Gradually, though, and with a lot of prodding by the government, mass market gambling–particularly in newer casinos in Cotai–is starting to develop.  This has important profit implications for all the publicly traded casino stocks.

Consider two examples:

A.  one high roller…

agrees to bet a minimum of US$3 million over a two-day stay in Macau.  He loses 3% of the amount bet.  The hosting casino wins US$90,000.

B.  45 mass market players…

each bet US$10,000 over a two-day stay.  They average a loss of 20% of the amount bet.  The hosting casino wins US$90,000.

Catering to group A is a very different business from catering to group B.

One obvious difference is that you need a lot more hotel rooms to house the mass market players (on the plus side, many of them will likely be paying for their accommodations).  Also, unlike Group A-ers, Group B-ers won’t be holed up in a private room all day gambling.  They’ll want to walk around with their companions, see shows, go shopping, eat in nice restaurants.  Therefore, to get them to come to Macau–and to get them to come back–casino operators have got to have very substantial non-casino operations.

That costs money.  The good news is that Group B is also more than happy to pay for entertainment, too.  In fact, the history of the Las Vegas strip shows that the non-casino entertainment business there grew from next to nothing a generation ago to a profit center equal in size to gaming operations by the early days of this century.  Although Hong Kong investors don’t seem to believe this, I think the same process is well underway in Macau.

license renewal

After Macau reverted back to China from Portuguese control, the new SAR granted casino licenses for 20-year periods.  For SJM and MGM China, their licences expire in 2020.  For everyone else, it’s 2022.

Casino companies are reporting that Macau has recently opened negotiations for license renewal.  This comes several years earlier than the market had expected.

Why so soon?

I think it’s because the government’s bargaining position weakens with time.

If it waits until, say, 2018 to negotiate with SJM, which controls almost a third of the gambling market, who has the upper hand?  The government can shut SJM down.  But that would throw a whole lot of people out of work and punch a gigantic hole in the government budget.  There are, of course, any number of casino operators chomping at the bit to get into this market who would be willing to replace SJM.  But it would take years for any of them to acquire land and build casino complexes–and that’s assuming there’s suitable land available for development.

Come to an impasse in 2015 instead and there’s still lots of time for Macau to tweak the capacity addition plans of other casino companies and find a new entrant before the old license expires.

Looking from the other side of the negotiating table, the minute the government announced non-renewal of a license, I’d expect the affected company’s business would immediately collapse.

To be clear, I don’t expect any of this “nuclear option” stuff will ever come into the foreground of negotiations, much less happen.  But the threat to a recalcitrant operator still exists, even if it’s unspoken.

One other thing:  if I were Macau and anticipating I might be forced to alter the license of a single casino firm in a negative way, I’d want negotiations with all the others to be settled favorably and announced to the financial markets before I took action.  That way I could make it clear that the government was disciplining a rogue, not taking arbitrary and crazy action against the gambling industry as a whole.

All in all, I expect license renewal to be a non-event.  But the process is worth keeping an eye on.

Macau gambling: July 2013 results + other stuff

Earlier this week the Macau Gaming Inspection and Coordination Bureau (DICJ) posted the total market casino “win” (i.e., the amount gamblers lost to the casinos) during July.  The figures are as follows:

Monthly Gross Revenue from Games of Fortune in 2013 and 2012
Monthly Gross Revenue Accumulated Gross Revenue
2013 2012 Variance 2013 2012 Variance
Jan 26,864 25,040 +7.3% 26,864 25,040 +7.3%
Feb 27,084 24,286 +11.5% 53,948 49,325 +9.4%
Mar 31,336 24,989 +25.4% 85,284 74,314 +14.8%
Apr 28,305 25,003 +13.2% 113,589 99,317 +14.4%
May 29,589 26,078 +13.5% 143,178 125,395 +14.2%
Jun 28,269 23,334 +21.1% 171,447 148,729 +15.3%
Jul 29,485 24,579 +20.0% 200,932 173,308 +15.9%

Source: DICJ

For the fifth month in a row, the aggregate win in the SAR exceeded MOP28 billion. For the past two months, the year-on-year revenue growth comparison exceeded +20%.

It’s a bit too early for dancing in the streets, however.  A glance at the relevant date for 2012 shows that part of the apparent strength is due to the weak denominator–that is, the comparisons are easier than normal because growth in casino patronage fell off dramatically in the second half of 2012 both because of softness in the Chinese economy and the desire of big gamblers to maintain a low(er) profile in advance of the once-in-a-decade change in top leadership of the Communist Party.

Here are the 2012 figures:

Monthly Gross Revenue from Games of Fortune in 2012 and 2011
Monthly Gross Revenue Accumulated Gross Revenue
2012 2011 Variance 2012 2011 Variance
Jan 25,040 18,571 +34.8% 25,040 18,571 +34.8%
Feb 24,286 19,863 +22.3% 49,325 38,434 +28.3%
Mar 24,989 20,087 +24.4% 74,314 58,521 +27.0%
Apr 25,003 20,507 +21.9% 99,317 79,028 +25.7%
May 26,078 24,306 +7.3% 125,395 103,334 +21.3%
Jun 23,334 20,792 +12.2% 148,729 124,126 +19.8%
Jul 24,579 24,212 +1.5% 173,308 148,337 +16.8%
Aug 26,136 24,769 +5.5% 199,444 173,106 +15.2%
Sept 23,866 21,244 +12.3% 223,310 194,350 +14.9%
Oct 27,700 26,851 +3.2 251,011 221,200 +13.5%
Nov 24,882 23,058 +7.9% 275,893 244,258 +13.0%
Dec 28,245 23,608 +19.6% 304,139 267,867 +13.5%

Source: DICJ

There’s a second factor that may make the recent figures more difficult to interpret–the development of the mass market in Macau.  High-roller baccarat players in Macau are effectively professional gamblers.  They lose around 3% of the (huge) amounts they bet.  Mass market players bet far less.  But they typically lose 20%+ of their wagers.  As this latter segment grows, market win may accelerate for a while.  I don’t think we’re at that point yet, but I don’t know.

Nevertheless, the continuing resilience of the SAR’s gambling business in the face of reports of softness in the Chinese economy is encouraging.

More on Monday.