There's no question that Las Vegas Sands (NYSE:LVS) got out ahead of a lot of competitors when it began building casinos in Macau and specifically on the Cotai Strip. Sheldon Adelson's vision for the region has played out exactly as he planned, and for investors who timed their purchases right, the returns have been phenomenal.
As we look forward to 2016 and beyond, the story for Las Vegas Sands might change. The only new resort on the horizon will be completed next year and competition is heating up on Cotai. The road forward may not be the same growth path we've become accustomed to for this gaming giant.
Competition is heating up
For many years, Las Vegas Sands was the dominant player in the Cotai region of Macau. The Venetian Macau, Four Seasons Macau, and Cotai Central basically only had to compete with Melco Crown's City of Dreams and Galaxy Macau on a local level. But a building boom is changing that.
Galaxy recently opened phase 2 of its project on Cotai, Melco Crown is putting the finishing touches on Studio City, Wynn Resorts is completing Wynn Palace, and MGM and SJM are building properties that will be completed in the next two years. Las Vegas Sands will open The Parisian next year, but that's five new resorts to compete with in Macau.
Competition is a challenge no matter where it comes from, but it's worse in a market that's declining like Macau is right now. The combination could lead to declining revenue and earnings well beyond 2015.
Is Asian gaming in a long-term slump?
In the first seven months of this year, gaming revenue in Macau is down 36.7%, which is a drag on the entire industry. And it's just one indication of what is happening in gaming in Asia. Revenue is down in Singapore, where Marina Bay Sands' revenue was down 11.4% in the second quarter. Even Las Vegas has seen a decline in gaming revenue because of a lack of Asian players.
If gaming overall recovers, it could absorb the new supply in Macau and help operations in Las Vegas and Singapore, but if it continues to decline, it'll be a huge drag for Las Vegas Sands.
Many questions for Las Vegas Sands
Shares of Las Vegas Sands may look cheap today at a P/E ratio of 18 and a dividend yield of 4.8%. But if the pressures facing the company result in declining revenue and earnings over the next few years, that could prove to be a high price to pay for the stock.
It's unknown exactly what will happen to gaming, particularly in Macau, but knowing the risks and what to look for can be helpful to investors. When looking at Las Vegas Sands, it's worth keeping an eye on Asian gaming as a whole and how competitors are doing with their expansion plans because they'll have a big impact on earnings. The future might not be as bright as many investors want to think.