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Las Vegas Sands Corp. (NYSE:LVS), one of the leading destination properties and casino operators in the world, reported impressive financial results in FY 2013 with respect to its revenue performance. The company's net revenue for FY 2013 was $13.77 billion, up 23.7% in comparison to the previous fiscal year.

The company benefited from strong gaming volumes in Macau. The company generated 63.98% of its total revenue from operations in Macau during FY 2013, as shown in the table below.

Source: LVS 10K and Earnings Release

The table above shows that the company's operations in Macau recorded 34.24% revenue growth in FY 2012 and 37.73% revenue growth in FY 2013. So, this region is the main revenue driver for the company, as it contributed 63.98% to the company's total revenue in FY 2013. The company recorded increase in both mass table and slot gross gaming revenue in Macau, as shown in the chart below, that supported the company's overall revenue growth in the region.

Source: LVS 4Q13 Earnings Call Presentation

Las Vegas Sands' CEO, Sheldon Adelson also highlighted Macau as the leader in the company's growing portfolio of casinos and hotels. Therefore, in this article, I will determine the company's future outlook with respect to its revenue growth in Macau.

Trends Supporting the Company's Impending Revenue Growth in Macau

Growth from Chinese Traffic

Macau is the biggest gaming market in the world, and the only market in China to propose legalized casino gaming. There are projections of rapid increase in middle-class Chinese urban households in the coming years, shown in the chart below. This means growth in disposable income and consumption that will turn into a macroeconomic supporter for growth in Chinese leisure and tourism markets: the main industries in which the company operates.

Source: LVS 4Q13 Earnings Call Presentation

The projections and growth trend in the Chinese tourism industry with respect to the number of tourists and tourism expenditure is shown in the charts below.

Source: LVS 4Q13 Earnings Call Presentation

Growth in the Chinese tourism market will drive more visitors to Macau from China. More than 160 million Chinese are projected to travel outside of China by the year 2018 (a rise from 83 million in the year 2012). Transportation connectivity across China, especially in the Pearl River Delta region, will expand and contribute to increased growth in the number of visitors. Furthermore, ongoing non-gaming $20B resort development in Hengqin Island, situated next to Macau Island, will trigger Macau's diversification and further its development as a business and leisure tourism destination. The following charts highlight the growth in Mainland China visitors to Macau up until 2013.

Source: LVS 4Q13 Earnings Call Presentation

In order to take advantage of the growing market, the company is investing more money to expand its portfolio of properties. I will discuss some of the major projects of the company in the paragraphs that follow.

Projects under Development

The Company is Heavily Investing in Macau

(click to enlarge)

Source: LVS 4Q13 Earnings Call Presentation

The Macau gaming industry is now 7 times larger than the Las Vegas gaming industry. The industry players there are still confident regarding further growth in the market, and are investing more, as you can see from the chart above. Las Vegas Sands is currently constructing the Parisian Macau that is targeted to open late 2015. This is in addition to the Sands Cotai Central's new phase construction that is expected to be completed by May 2014 (the deadline of completion is set under the company's land concession for Sands Cotai Central). The company expects more than $1 billion in annual EBITDA from Sands Cotai Central, which will then have more than 200 mass market tables to offer.

The company has submitted plans to the Macau government for The Parisian Macau, an integrated resort that will be connected to The Venetian Macau and Four Seasons Macau. The Parisian Macau will operate under the company's gaming sub-concession. The company's management updated in its latest earnings call that the company is on track to open The Parisian and St. Regis Tower in Q4 2015. Citigroup estimated that The Parisian will generate an annual run-rate EBITDA of $934 million that infers a return on capital of 35% based on the planned development cost of $2.7 billion, which is inclusive of payments made for the land premium.

Macau Gaming Industry Outlook is One of the Major Supporters for the Company's Upcoming Growth

After recording an enormous growth in the gaming and tourism industry, Macau is still forecasted to gain more growth potential. Nomura Securities recently issued a research report on the Macau gaming and tourism industry, reflecting optimism for further growth. According to the Japanese firm, the region may just be recording the beginning of its growth phase and the market size could almost double from $45 billion to $80 billion in the coming years. The analysts are regarding the Macau market as underpenetrated. According to Nomura, the market is mature when it reaches a penetration rate of about 25%, but currently the penetration rate of the Macau market is estimated to be only 1.4%-2.1%. This means that Mainland Chinese visitation to Macau needs to rise to approximately 217 million, or 12 times the figure of 2013 (around 19 million), before Macau turns into a mature market for tourism.

In mature markets such as the US, one gaming position serves around 200 people. In Australia, one gaming position serves approximately 70 people, while in Macau, one gaming position serves around 1,900 people. Even after including the 2015-2017 growth, one gaming position in Macau will only serve about 1,300 people. So, this tells about the room for penetration in the market.

In immature growth markets such as Macau, it is observed that supply drives growth. In other words, the more casinos that are available, the more likely growth is to happen. So, investment in Macau by the company's competitors will also turn into a growth driver for the market and the company.

Despite these positive overall forecasts, one should consider the risks that may create hurdles for the company to meet these projections. So, I will also consider some of the aspects that can add risk of the company not achieving its projected growth in Macau.

A Glance at the Dark Side of Bright Projections

Diversion of Chinese Traffic to Some Other Destinations

Although there are projections of more visitors from Mainland China to Macau, Japan has appeared as one of the most desired destination for the China's wealthy travelers, as per a recent report issued by Travelzoo Asia-Pacific, for the year 2014. This is because of the weak yen, which has supported Japan to turn into a new shopping bliss for the rich Chinese travelers. The softened visa restrictions for Japan after the 2012 earthquake have also helped in attracting more tourists.

Another landing place that is turning into a top vacation destination for the Chinese tourists is the U.S. Brokerage CLSA issued a report which projected that the number of Chinese visitors landing in the United States will be more than triple by 2020. The new trend will emerge as the people are willing to diverge from conventional vacation spots like Hong Kong and Macau. A major attraction for the Chinese travelers to plan a trip to the U.S. will be the lower prices of renowned international brands in the US as compared to China. As a result, these emerging destinations put Macau in a tough position as the most desired destination for Chinese tourists. If these factors materialized, the company's high expectations for tourists from Mainland China may be jeopardized.

Deadline for Facilities Construction if not met

The company is required to complete Sands Cotai Central by May 2014 and bring The Parisian Macau into operation by April 2016. If the company will be unable to meet the applicable deadlines or get extensions for the respective deadlines, the company may lose the related land concession. This would constrain the company from operating any facility developed under such land concession. The company has already received two extensions of the development deadline from the Macau government under the land concession for The Parisian Macau. The company is expected to apply for an extension to complete Sands Cotai Central as well.

Returns to Shareholders and My Take

The company's management's commitment to make cash returns to its shareholders is likely to support the price performance of the company's stock. The company's management intends to pay a quarterly dividend of $0.50 per share in the year 2014, that is a 43% addition to the $0.35 per share paid quarterly in the year 2013. Additionally, there is a $1.5 billion authorized share buyback offer present under the current plan.

The company's investments in new Macau properties are likely to pay off handsome returns to the company in the coming years. The Macau market has very attractive growth prospects for the gaming and tourism industry, since it is still an immature market. Penetration and increased supply will boost the top and bottom lines of casino operators in Macau. The rise of the middle class population in China and infrastructure developments in the region will also trigger more visitors to Macau from China. But there are risks associated with the growth projections for the rise in Chinese tourist traffic and timely completion of construction projects for the company's properties in Macau. If these risks materialize, the company may not be able to achieve its growth targets in the region, resulting in a financial loss. But considering the overall growth prospects of the company in Macau, the major revenue-generating region for the company, along with the company's return to shareholders, I will regard the company's stock as a good buying opportunity.

Source: Macau Will Extend Las Vegas Sands' Growth Story