Macau is going through a new phase of expansion, and the concern for gaming operators with existing resorts has always been that new properties would eat away at their revenue and earnings.
Las Vegas Sands Corp (LVS +0.04%) saw that competition in full force in the third quarter, and the pressure will only continue. Wynn Resorts' (WYNN +0.32%) newest property, Wynn Palace , has been open for a year, but MGM Resorts (MGM 2.02%) and SJM both have new resorts that will open in the next year. Las Vegas Sands' best days may be behind it.
The Parisian is the only reason Las Vegas Sands' revenue and earnings grew in the third quarter of 2017. Image source: Las Vegas Sands.
What the quarter looked like
Overall, Las Vegas Sands' quarter doesn't look too bad. Revenue was up 7.7% to $3.20 billion and adjusted property earnings before interest, taxes, depreciation, and amortization (EBITDA) -- a measure of cash flow from a resort -- was up 6% to $1.21 billion, or 10.4% to $1.18 billion on a hold-adjusted basis. Even net income was up 13% to $685 million, or $0.72 per share, but these headline numbers don't really tell the whole story.
All four of Las Vegas Sands' resorts in Macau saw revenue and EBITDA fall year over year. The only reason EBITDA rose at all in Macau was the addition of The Parisian to the portfolio, which opened in mid-September 2016. Below is a table of revenue and EBITDA changes at the most important resorts in Macau.
| Resort | Q3 2017 Revenue | Q3 2017 EBITDA |
|---|---|---|
| Venetian Macau |
$718 million (7.1%) |
$263 million (16.5%) |
| Sands Cotai Central |
$474 million (8.5%) |
$155 million (11.9%) |
| Four Seasons Macau |
$147 million (8.7%) |
$52 million (16.1%) |
| Sands Macau |
$143 million (14.4%) |
$41 million (10.9%) |
Data source: Las Vegas Sands earnings report. Chart by author.
Marina Bay Sands was the one bright spot, driven by higher VIP play. Revenue was up 4.1% to $793 million, and property EBITDA rose 13% to $442 million. The biggest driver was a 30.1% increase in rolling chip volume -- a measure of VIP play -- to $9.44 billion.
What this means for Macau
The bad news for Las Vegas Sands is that overall Macau had a great quarter. Gaming revenue was up 21.8% in the third quarter, compared to Las Vegas Sands' 12.1% increase in gaming revenue and 11.1% increase in EBITDA in the region. Keep in mind, that includes a whole new resort that barely contributed to financial performance a year ago.
It's clear that Las Vegas Sands is losing market share. The two drivers are the fact that VIPs are driving Macau's growth right now, which favors a company like Wynn Resorts that caters to VIPs. The other big factor is that new resorts are taking the mass-market players that Las Vegas Sands caters to.
Why this is a problem long-term
Las Vegas Sands has become a great dividend stock, with an expected $3.00 per share dividend in 2018, implying a 4.8% dividend yield. Paying the dividend alone will cost $2.38 billion, given the 792 million shares outstanding. On top of that, management expects to spend an average of $980 million in capital expenditures every year between 2017 and 2020. The dividend and capex alone will eat up $3.36 billion, compared to $4.68 million in EBITDA generated over the past year. And that doesn't account for the fact that Las Vegas Sands only owns 70% of its Macau operations, implying that owned EBITDA was just $3.93 billion (before repatriation taxes). That doesn't leave a lot of excess cash beyond paying the dividend.
Las Vegas Sands isn't yet in danger of needing to reduce its dividend, but it may need to if it continues to lose market share in Macau. Competitors are clearly taking business from Las Vegas Sands. If you own this stock for its cash flow and dividend, it may not be as safe of an investment as it was a year or two ago.
