Photo: Las Vegas Sands
Based on analyst estimates, Las Vegas Sands (LVS 1.25%) has 22% market share in Macau. The company's first-quarter 2014 revenue of a record $4.01 billion, up over 21% year-over-year, was also the highest in the industry above that of competitor Wynn Resorts (WYNN 4.15%). The company's huge bet on Macau paid off with nearly 50% EBITDA growth at its operations there. But how will the company continue to produce these incredible results?
Sands Macau
Even better execution will lead to more growth
As an answer to a question about what will drive the company to continue posting these exceptional quarters of revenue growth, Las Vegas Sands President of Global Gaming Operations Robert Goldstein said this:
We can drive more customers into our hotels who are high value casino guests, EBITDA will grow, margins will follow, obviously SCC and Venetian are the targeted places because of the room capacity there. We are thrilled with $13,210 per table right now, Shaun, but we think we can get a lot stronger.
"We think the key to our performance clearly is – resides in the amount of tables we have, the amount of rooms we have to put people and that say amazing competitive advantage that is deep root and structural. That's the key of our business.
"We are not saying we won't be in other businesses or segments. But obviously the big driver Macao, the most unique thing about that market is the non-rolling market and that is our focus. And our belief is we can dominate that market with our room supply, our table supply, the good management team and execution.
Just what does that 'better execution' mean?
1) An even bigger bet on mass table revenue
Operations in Macau over the last decade have been largely focused on the profits coming from VIPs, the high rollers of the gaming industry. However, companies will bring in more profit from the mass-market segment of gamblers going forward, and these companies are betting accordingly. With wealth increasing for mainland Chinese, already Macau's largest audience, and leisure travel spending increasing as a result, Las Vegas Sands and Wynn Resorts are each ramping up their mass-market appeal with more rooms and gaming tables.
Mainlanders make up 64% of Macau's visitors. With more and more coming, that percentage going higher will mean huge gains for these companies who bet right. Source: Macau Government Statistics
There is still much growth to come from Mainland Chinese. Nomura Securities estimates that only about 2% of mainland Chinese have visited Macau, which leaves out about 1.3 billion of China's population. The same group estimates that about 25% of Americans have been to Las Vegas.
Even a fractional increase in the percentage of mainlanders who visit Macau next year would result in a huge jump for the mass-market gaming segment there. With advancements like a new bridge from Hong Kong to Macau, a better rail system that links separate parts of the island for faster transportation to and around the island, and digital passport entry and exit into and out of Hong Kong and Macau, there are plenty of reasons to be bullish that this increase in visitation will come.
Wynn posted strong 2013 earnings mostly because its mass-market revenue surged in comparison with that of its VIP segment. The company's 2013 fourth-quarter profit increased by an astounding 92% year over year, led mainly by an increase of 35% in mass-market gaming revenue in Macau compared with 24% growth in VIP gaming for the same time-frame.
Mass market table revenue is up 58% for Sands in Q4 2013 over the
same period last year. Source: Sands 2013 earnings presentation
Wynn and Las Vegas Sands are both betting big on this trend, but once again, Las Vegas Sands has done it the best. Las Vegas Sands won huge on mass table revenue in 2013 as revenue from this revenue segment jumped 58.3% from the fourth quarter of 2012 to the same quarter of 2013. This increase in mass-market revenue led to net income for the company's Asian operations increasing 40% over the same quarter in 2012.
2) An even better casino coming
The main area in Macau which is spurring new growth and profits is the Cotai strip. The area has seen near-constant development as casino companies build bigger and better resorts, most of which will open in the next 18 months.
Wynn Resorts is hoping for a surge in revenue from the addition of its $4 billion Wynn Palace Cotai which could open as early as the end of 2015. This amazing new resort will help Wynn host more guests in Macau. One highlight in the company's most recent quarter was that because of mass-market operations its room occupancy rate increased from 93% in the first quarter of 2013 to 98% during the same period of this year. With this casino Wynn has bet on driving even more guests to its properties in Macau.
Yet once again, Las Vegas Sands will win on this one as well. The two casinos on the strip owned by Sands, The Venetian Macao and the Sands Cotai Central, have already posted solid growth and revenue.
Las Vegas Sands is preparing its own newest integrated casino resort, which will be its fourth resort and fifth casino on the Cotai Strip. The Parisian, which will open in mid-2015 as much as six months before Wynn Palace, is set to be a major advance for gaming in Macau. This resort will be the biggest of the new resorts put up by Wynn or others with over 3,000 hotel rooms and suites, roughly 450 table games, 2,500 slots, a retail mall, and an impressive replica of the Eiffel Tower at 50% scale.
The coming Parisian resort on Cotai, the biggest of the coming casinos. Photo: Las Vegas Sands
Final Foolish takeaway: better execution for more quarters of incredible profits
When the Las Vegas Sands president said "better execution", he meant that the company will take what has been working extremely well for the last five years and make it even better. With a growing bet on Macau's mass market and the new Parisian resort opening next year, Foolish investors should be watching for more quarters of incredible revenue from this company that will keep it ahead of competitors like Wynn Resorts.
At its current P/E multiple of 24, which is reasonable in this industry, and a stock price of around $76 compared to a target in the high $90s, Las Vegas Sands could be very profitable for Foolish investors who are willing to make the bet now.
