Slowdown in Asia Hits Gaming Companies

This week has been an earnings bonanza in the gaming industry. On Monday, Caesars Entertainment (Nasdaq: CZR  ) reported an even bigger loss than it had a year ago and on Tuesday, MGM Resorts (NYSE: MGM  ) and Melco Crown (Nasdaq: MPEL  ) delivered mixed results, continuing a trend of so-so numbers coming out of China. Let's dive into the numbers by location.

China slowdown hurting play
Reports from Las Vegas Sands (NYSE: LVS  ) and Wynn Resorts (Nasdaq: WYNN  ) previewed mixed results for MGM and Melco Crown, driven by a slowing of VIP play.

MGM bucked the trend last quarter to some extent, experiencing a 6% rise in revenue to $709 million and a 14% increase in property EBITDA to $187 million. Meanwhile, Melco Crown's revenue fell 2% to $960 million and adjusted EBITDA fell 6% to $203.8 million. The better performance from MGM was the big driver of the company's 10% pop yesterday, despite reporting a loss overall.

Melco's City of Dreams did experience a 12.6% increase in revenue to $684.2 million and adjusted EBITDA rose 21.8% to $184.3 million. The decline in revenue overall was fully attributed to Altira Macau, which doesn't have an attractive location in relation to other resorts.

Melco did show that it appears to be getting spill over from Las Vegas Sands' new Cotai Central resort. The revenue trends of the Cotai resorts will need to be watched closely going forward, but for now City of Dreams' performance is very good.

Back to the desert
In Las Vegas there wasn't a lot to cheer about, but numbers were steady. MGM's wholly owned resorts (primarily in Las Vegas) saw no change in revenue from a year ago and property EBITDA rose 4.2% to $345.2 million. CityCenter actually swung to an operating profit of $642,000, hardly enough to justify the $8 billion resort, but a good thing nonetheless.

Caesars, on the other hand, saw a slight decline in revenue to $780.7 million in Las Vegas and property EBITDA fell 8% to $214.4 million. Revenue actually held up well in comparison to Las Vegas Sands and Wynn so Caesars isn't losing ground in Las Vegas.

The big picture
Now that all five major gaming companies have reported earnings we can look broadly at how they are performing. As you can see below, the two Las Vegas-centric companies, MGM Resorts and Caesars Entertainment, are the only two that are still losing money on the bottom line because of massive debt loads and continued weakness in gaming. While others are paying down debt, Caesars actually increased debt and is the one company I would avoid like the plague.

The decline in EBITDA at all three companies dependent on Asia is surprising and shows the slowdown in growth occurring right now. The good news is that Sands Cotai Central is the only new supply to hit the market for at least three more years, so growth should follow more closely with Macau's gaming expansion in coming years.

  Q2 Revenue / % Change Q2 EBITDA / % Change Q2 EPS
MGM Resorts $2.32 billion / 28.7% $501.5 million / 37.1%* ($0.30)
Melco Crown $938.5 million / (2.2%) $203.8 million / (5.8%) $0.15
Caesars Entertainment $2.17 billion / 0.2% $512.4 million / (2.6%) ($1.93)
Las Vegas Sands $2.58 billion / 10.1% $844.7 million / (6.3%) $0.29
Wynn Resorts $1.25 billion / (8.4%) $384.1 million / (14.1%) $1.37

* Note: MGM China was not fully consolidated in Q2 2011, so the growth rates are skewed higher.

The biggest thing we can take from the table above is that growth is slowing tremendously in the gaming industry. After explosive growth in Macau and Singapore companies are now facing single-digit growth overall in Macau gaming and increased competition for VIP players.

The landscape is changing
With the industry entering a relative lull in expansion, I think it's time for investors to focus on the most profitable companies in gaming. Melco Crown, Wynn Resorts, and Las Vegas Sands are all making money, despite the slowdown in revenue in EBITDA at their resorts. These are the only three worth buying into right now.

As U.S. gaming companies set out to dominate Asia -- and soon Europe -- we have our eyes on three more companies benefiting from international growth. Check out which stocks they are in our free report called "3 American Companies Set to Dominate the World." The report is free when you click here.

Fool contributor Travis Hoium manages an account that owns shares of Wynn Resorts and Melco Crown. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On August 08, 2012, at 4:12 PM, cp757 wrote:

    Its hard to understand the vision of an Integrated Resort (IR) that is unique to Sheldon Adelson. We miss the details that went into his planing. An integrated Resort is a Singaporean casino based vacation resort but the term now applies to all of the Las Vegas Sands properties. The term "integrated resort" is a euphemism used by Singapore because of the opposition to the word "casinos". To date, Singapore has licensed only the Marina Bay Sands and one other operator but Sheldon Adelson's, Marina Bay Sands is the only true Integrated Resort in Singapor.

    Most school kids will tell you that David killed Goliath with a rock. The truth is it was not the rock that killed Goliath. It took three things to kill Goliath and if you take away any one of these things you would have allowed Goliath to win the day as he had twice a day for 40 days. The first thing that was needed on that day was David's belief that he would win and he did. The second thing David needed was the sling and rock with the knowledge to use it, and the last thing David needed to kill Goliath was a sword to cut Goliaths head off and feed his body to the birds.

    This is only to say we simplify things in life without understanding how things work. We miss the big picture about the story of David and Goliath. What is worse, we don't apply the real lesson to the challenges in every day life. All the solders that Saul had sent to challenge Goliath had failed. We are told 80 solders had challenged Goliath and lost. They used all the technology of the day and Saul even offered David his best armor and David refused. Those 80 solders that Saul sent to fight Goliath all had courage and a sword but what they didn't have was the sling and rock and the knowledge to use it.

    David had vision and courage and so does Sheldon Adelson. Adelson's sword is the massive profit's he earns and this makes everything possible for him to achieve. Without his vision and courage those financial gains would sit in a bank and earn interest. No other operator makes as much bottom line profit. What makes Mr Adelson unique, is his vision of an Integrated Resort and that is his sling and rock. Every government in the world wants Las Vegas Sands to build an Integrated Resort in their country. They know his idea has been proven to work but you cant build a cheap Integrated Resort. Many developers will build resorts that they will call Integrated Resorts but they are a shadow of Adelsons dream and still just a resort.

    In Macau Las Vegas Sands owns, The Venetian Macao, The Plaza Macao, Four Seasons Hotel Macao and the Four Seasons-branded apartments at the Sands Cotai Central development, as well as the Sands Macao on the Macau peninsula. The company is currently finishing construction on a 6,400-room complex at Sands Cotai Central, which will feature the Sheraton, St. Regis, Holiday Inn, and Intercontinental hotel brands.

    Las Vegas Sands will build The Venetian Hengqin International Convention and Resort Project, a 10,000 room multi-billion dollar project to develop parts of Hengqin Island into a convention and resort destination. The project will include four million sq ft of convention space, hotels, retail, vacation homes, and golf, tennis and yachting amenities. Hengqin Island is next to Cotai Central giving Las Vegas Sands added room capacity with a total of almost 24,000 rooms just in the Macau area.

    In Singapore The Marina Bay Sands is the Integrated Resort Sheldon Adelson envisioned and developed, it is billed as the world's most expensive standalone casino property at $8 billion dollars, including the cost of the prime land. In Las Vegas Sheldon Adelson envisioned and built two Five-Diamond luxury resorts on the Las Vegas Strip, The Venetian and The Palazzo. In Bethlehem, Pennsylvania The Sands Casino Resort Bethlehem, in the Lehigh Valley region of eastern Pennsylvania is an iconic structure that rose from the ashes of the old Bethlehem Steel building .

    These Integrated Resorts are a brand new concept because Mr Adelsons epiphany or insight into the reality of the essential meaning of leisure time and business development only started to take form in 1999. His vision was The Venetian Resort in Las Vegas but that has grown to all these other properties. Just the cost of the buildings he has erected is approaching 20 billion dollars. He has paid cash for almost all of this from the profits he has made as he grew his dream. Sands Macau opened on May 18, 2004 and all of the mortgage bonds that were issued to finance construction were paid off in May 2005. His total Net Debt for this massive project is 5.884 billion dollars. Countries see the ability for him to bring in billions in tax revenue and banks offer him 3% money to do whatever project he see's.

    No other operator can compete with Sheldon Adelson at the same level. They not only lack his vision and courage, they lack the billion's that is Adelsons sword and the Integrated Resort that is his sling and rock.

    This is a link to the best presentation I have ever seen about Las Vegas Sands. "The World's Ultimate Casino" was made by the Discovery Channel (44:33) The Venetian Macau opend on August 28 2007.

    http://www.youtube.com/watch?v=pl2aOLlIUOc&feature=relat...

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