Source: Las Vegas Sands
Casino operator Las Vegas Sands (LVS -0.37%) has fallen by more than 27% in the last six months, as investors seem to be clearly concerned over falling gaming revenue in Macau. However, Las Vegas Sands is still an enormously profitable business with abundant opportunities for growth, both in Macau and in other geographies. Is the dip in Las Vegas Sands a buying opportunity for investors?
Slowing growth in Macau
Macau is the only region in China where gambling is legal, and Las Vegas Sands is one of the only six companies in the world with licenses to operate in the region. Not only that, but the company owns a leadership position in the lucrative Macau Cotai Strip, and it plans to continue expanding aggressively in that market in the medium term.
While Las Vegas Sands also has operations in Singapore and the U.S., Macau is by far the main growth driver for the company.
According to the Macao Gaming Inspection and Coordination Bureau, casino revenues in the region fell 6.1% during the month of August. This was the third consecutive monthly decline in 2014, and acceleration versus declines of 3.6% and 3.7% for July and June, respectively. Accumulated gross revenue for the first eight months of the year is still showing an increase of 8.1%, however, recent trends are certainly not encouraging.
Authorities in China are implementing a series of measures against corruption, including credit restrictions on VIP gamblers in Macau in order to stop illegal maneuvers to siphon money from mainland China to Macau. In addition, decelerating economic growth and a weak property market in China are other factors weighing on Macau over the last months.
Solid fundamentals
It's hard to tell how long it may take for the Macau market to get back on track, however, the long term growth story for this exciting market is still intact. A rapidly growing Chinese middle class with increased disposable income, more efficient and affordable transportation infrastructure in the region, and more attractions for different kinds of travelers should generate sustained demand growth in the years ahead.
According to Las Vegas Sands' management, 200 million Chinese people are expected to travel outside of China by 2020, more than double the 97 million international Chinese travelers registered in 2013. In addition, Macau is expected to continue attracting travelers from all over the world, especially from other Asian countries where gambling is illegal.
Las Vegas Sands has ambitious expansion plans in Macau; The Parisian Macau is scheduled for inauguration in late 2015, and will provide 3,000 additional rooms to the company's presence in the region. All in all, Las Vegas Sands plans to have more than 12,600 rooms in Macau by 2017, representing a leading market share of 43% among gaming operators in the region.
Source: Las Vegas Sands
Las Vegas Sands is also leveraging its experience and reputation as a successful operator in Asia to explore opportunities in countries such as Japan, South Korea, and Vietnam. Considering what the company has achieved in China, investors have good reasons for optimism. If Las Vegas Sands manages to successfully replicate that experience in other Asian markets, it could open the door for tremendous growth prospects over the middle term.
Betting on a winner
Over time, Las Vegas Sands has proven its ability to translate booming demand in Macau into rapidly growing sales and expanding profitability. Importantly, management is committed to consistently distributing capital to shareholders.
Source: Las Vegas Sands
Las Vegas Sands has returned $8.3 billion to shareholders via dividends and buybacks over the 10 quarter period ending on June 30, 2014. The company has a $2 billion share buyback program in place, and management has committed to repurchasing at least $75 million every month.
Las Vegas Sands increased dividends by a big 42.9% for 2014, which brings the dividend yield to a generous 3.2%. The dividend payout ratio is quite safe at less than 55% of earnings forecasts for the current year, so investors have solid reasons to expect sustained dividend growth from Las Vegas Sands in the future.
Key takeaway
Falling demand in Macau will probably create considerable uncertainty in the middle term, and there is scarce visibility as to when things could turn for the better. However, Las Vegas Sands is still a very profitable business with exciting growth prospects in the years ahead. Buying the dip in Las Vegas Sands looks like a smart bet.
