Gaming Companies Steer Clear of Las Vegas

Remember when the name Las Vegas Sands (NYSE: LVS  ) meant something? There was a Sands Hotel, sand dunes were practically out the front door, and all of the company's revenue was in Las Vegas. Boy, times have changed. The Sands Hotel has long been torn down for bigger, gaudier attractions. And the company has moved its focus to locations with far less sand and lots more water: Macau, and more recently, Singapore.

As ironic as the name Las Vegas Sands may be, the move to Asia has been very successful and may have saved the company through the credit crisis. Since the Sands Casino opened in 2004, the Macau market has grown incredibly fast. To feed the lust for gaming, Las Vegas Sands, Wynn Resorts (Nasdaq: WYNN  ) , Melco Crown Entertainment (Nasdaq: MPEL  ) , and MGM Resorts (NYSE: MGM  ) brought Vegas-style casinos and epic egos to rival local businessman Stanley Ho's STDM. But the alpha dog of the area has become Sheldon Adelson, the egotistical and always-entertaining CEO of Las Vegas Sands.

Expanding into Macau
Since moving into Macau in 2004, Las Vegas Sands has built the relatively modest Sands Macau and the expansive Venetian Macau, and is now constructing three hotels with a combined 3,836 hotel rooms on the Cotai Strip. There are also undeveloped sites for future growth. Controlling seven sites on the Cotai Strip today is like owning half the land on the Las Vegas Strip in the 1980s.

The financial picture has been almost as impressive as the hotels. Asian expansion pushed adjusted EBITDA outside the U.S. last year to 75% from just 55% in 2006. In the latest quarter, Asian revenues, which only included Macau, grew 23.2% compared with a measly 2.2% in Las Vegas. Casinos are a highly leveraged business, so it's important to see revenue growth to stash away cash to pay off that impending debt.

Competitors have noticed this growth, and I'm worried about overexpansion. Las Vegas Sands plans to build another 6,000 hotel rooms at developments that have been halted for now. Compound that with expansion plans from Wynn Resorts, and Harrah's trying to wiggle its way in; we could have competitive problems worse than the ones in Las Vegas in the future.

The ace up Adelson's sleeve is the way he has built Macau. He owns a ferry service that delivers passengers to buses conveniently going to The Venetian Macau. Combine the captive mass-market traffic with a large convention center and the large percentage of the Cotai Strip owned by Las Vegas Sands, and you have a pretty good way to keep people in your properties.

Asia, beyond Macau
Possibly the biggest roll of the dice is in Singapore for both Las Vegas Sands and Genting Singapore. Las Vegas Sands recently partially opened the uber-expensive Marina Bay Sands. Some analysts have predicted it will be the most lucrative casino in the world.

But, after an estimated $5.5 billion has been spent on construction, there are already unhappy customers. Power outages and an incomplete hotel caused the Inter-Pacific Bar Association to refuse payment for the first convention at Marina Bay Sands. Las Vegas Sands responded with its own lawsuit, and although a settlement seems near, the development is off to a bad start.

Unrest in Las Vegas
As if concerns about openings in Asia aren't enough, Las Vegas continues to be a drag. When Las Vegas decided to turn itself into a party town in the mid 2000s, gaming took a backseat to the perceived diversification of non-gaming revenue. But the recession put those plans into question. Consumers became more value-conscious, making clubs and pool fees unattractive, and hurting everyone's results.

Adjusted EBITDA (a commonly used metric for gaming companies) shows the difference between Asia and Las Vegas over the past two years. I've used a single casino in Macau to make the comparison a little less lopsided. Clearly Macau and now Singapore is the future. Las Vegas has been left in the dust.

Adjusted EBITDA (in thousands)

2009

2008

Percent Change

The Venetian Macau

$556,547

$499,025

+11.5%

Las Vegas

$259,206

$392,139

-33.9%

Source: Reports filed with the Securities and Exchange Commission.

The Foolish bottom line
This week's earnings and conference call will go a long way toward telling me if Las Vegas Sands is worthwhile for investors. The company has had a hard time getting gaming dollars to the bottom line through expansion plans, and if it can't start performing now, its $10.2 billion in debt could be a drag for the foreseeable future.

I'm watching Macau and Singapore closely. If they appear to be humming along, I may be able to overlook poor Las Vegas. Betting on gaming in Asia seems like an easy move, but it's one companies have spent tens of billions of dollars building. Odds are a little longer than they used to be.

More on gaming:

Fool contributor Travis Hoium is long Las Vegas Sands. Melco Crown Entertainment is a Motley Fool Global Gains choice. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (10)

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  • Report this Comment On July 29, 2010, at 4:30 PM, spokanimal wrote:

    Nice Job!

    That said, a couple of points about the article.

    First, Marina Bay Sands (Singapore) just blew the doors off with it's profit margins for what it had open in Q2... I wouldn't spend too much time dwelling on the inter-pacific bar issue.

    Second, when you say: "Compound that with expansion plans from Wynn Resorts, and Harrah's trying to wiggle its way in; we could have competitive problems worse than the ones in Las Vegas in the future"....

    .... you need to remember that Wynn won't start construction on Cotai until next year and that's IF they can get the highly-restricted "gaming table allowance" they need. if they do, completion isn't until 2014. Harrah's, on the other hand, owns the Cotai golf course and a "pipe dream"... there are just 6 licencees in Macau and a government that's steadfast "long-term" not to expand that.

    So, between now and 2014, there are just 2 resorts that will be completed: Galaxy Cotai and Sand's massive sites 5&6 that you mentioned... THAT'S IT!...

    ... and BOTH of those resorts are adjacent to Venetian Macau.

    Spokanimal

  • Report this Comment On July 29, 2010, at 5:40 PM, eldetorre wrote:

    Vegas is in the desert; It's only going to become more expensive to maintain operations there.

  • Report this Comment On July 29, 2010, at 10:30 PM, MainStreetMayor wrote:

    True on Singapore margins. But if the first two months weren't a smashing success they should shut the doors now. Q3 and more importantly Q4 will tell where that resort is headed. Reading reviews I get the feeling people aren't terribly impressed, although these half openings are almost always terrible.

    You're right on competition in Macau, building has definitely slowed down. And more capacity is fine if there's growth. But, currently Macau is growing at unsustainable levels and no one knows what gaming levels will be in four years. Even though 2014 seems a long way off if you add more hotel rooms than CityCenter between now and then it's a big impact. Just saying it should be on investor's radar. Great Macau results for LVS though.

    Travis Hoium

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