Is Las Vegas Sands' Big Fall Finally Over -- Or Just Beginning?

Image: Las Vegas Sands.

For years now, Las Vegas Sands (LVS -0.37%) has relied largely on its operations in Macau for its overall growth. That strategy paid off wonderfully for the casino giant when times were good in the former Portuguese colony, but more recently, Macau has gone through a huge contraction in gaming-related revenue, and Las Vegas Sands stock has suffered the consequences. Now, many of those who follow the industry believe that the worst might be over for Macau, yet the turmoil in China's stock market could create economic problems in the emerging-market giant that could have even more negative effects on gaming activity.

Let's look more closely at what's been happening with Las Vegas Sands and whether its recovery from its losses earlier in the year mark a turning point for the company going forward.

Las Vegas Sands remains focused on Asia
Throughout most of the past year and a half, Las Vegas Sands has had to deal with the fallout from the Chinese crackdown on money laundering activity between the mainland and Macau. The government's moves have dramatically reduced the number of VIP visitors coming to the Asian gaming capital, and that in turn has crushed not only table-game results but also related factors like hotel-room occupancy and retail-store sales.

In response, Las Vegas Sands has doubled down on the Macau market's long-term potential. CEO Sheldon Adelson has pledged to remain a pioneer in the future development of the area, seeking to build out not only further gaming activity but also a broader range of entertainment options that could in turn start attracting conventions and exhibitions.

This strategy is the same one that Adelson used in Las Vegas to help reinvigorate the Strip, and appealing to a mass market is something that most of Las Vegas Sands' competitors are also striving to do. The company has been closed-lipped about trying to predict how quickly its efforts could pay off, as the poor conditions in Macau are unprecedented and stem from such a volatile situation.

In just the past few weeks, Las Vegas Sands has finally put in a substantial recovery, with share-price gains of more than 10% returning the stock to where it began the year. What's interesting is that fundamentally, the current situation for Macau looks worse than ever, with June's gaming revenue figures continuing to plunge and reaching their worst levels since 2010. Yet the Chinese government chose to relax its visa requirements for visits to Macau somewhat, extending the permitted period from five days to seven.

Moreover, even though year-over-year declines in monthly revenue will likely continue to look ugly throughout the rest of the year, the prospects for an end to sequential month-over-month drops have bullish investors calling for a bottom and arguing that the stock has gotten punished far beyond what Las Vegas Sands' long-term potential would justify.

Will a Chinese stock market crash spill over into Macau?
In the immediate future, Las Vegas Sands faces a brand-new threat to its short-run success. The Chinese stock market has dramatically reversed its bull market surge, falling 30% in just over a month and leading to aggressive moves from the Chinese government to try to stem the tide. Sharp declines in many companies' stocks have led to trading halts covering more than half the listings in the market, and state-owned banks have been given access to liquidity in order to encourage buying in an effort to reverse the drop.

For Las Vegas Sands, the potentially catastrophic problem is that most of the participants in the Chinese stock market are individual investors, and those who've accumulated wealth in the past could see it disappear in a prolonged bear market. Because those wealthier Chinese individuals are exactly the target audience that the casino industry in Macau is hoping to tap with its mass-market efforts, a market crash could result in a consumer-led recession that would have a disproportionately large impact on discretionary spending on travel and other luxuries. In addition, VIP activity could see further declines as well, with even those unaffected by the money-laundering crackdown possibly taking hits in their portfolios and thus choosing to cut back on their spending.

For now, investors in Las Vegas Sands don't appear to see China's wider problems as a direct threat. If China's economy doesn't remain healthy, though, the rebound that investors have seen in Las Vegas Sands stock could prove to be short-lived.