Las Vegas Sands Pays The Price Of Macau Hubris

• Las Vegas Sands has benefited from its substantial market-share in Macau
• Company faces fallout from crackdown in Macau and stiffer regulatory environment
• Dividend payouts are still growing and remain intact despite downturn in share prices

Las Vegas Sands (LVS) has seen a sharp downturn in its trajectory over the past year. The casino and hospitality company, which has a large portion of its revenue fortunes tied in the Macao industry, has been largely affected by the gaming haven’s financial troubles and recent laws and regulations by the mainland Chinese government. LVS’ problems in the region have been compounded by the financial uncertainty in China, and overall contraction in the Macanese gaming industry. However, the company has stayed relatively stable in terms of dividend payouts, increasing them by 10% consistently in the previous year.  Although there might be some questions as to their ability to maintain this payout rate, the company has the potential to be the strongest competitor in a weak field.

The Fundamental Perspective

LVS has seen its revenues decline consistently over the previous four quarters, with the most recent quarter’s revenues coming in -19.4% lower year over year. In the second quarter of 2015, the company underperformed relative to the S&P 500 (SPY) benchmark and the hotels, restaurants, and leisure industry on average, with the company’s net income slumping by -30.1% year over year. These trends have been manifested throughout the company’s financials, with earnings per share also dropping 40% to $0.59 year over year.

These negative financial trends can be mostly attributed to external factors, but nevertheless situations that are not expected to change in the near future. Macao, a long-time favorite gambling hub of high ranking Chinese political elite, has recently been hit by a crackdown on corruption by the Chinese Government. Overall, this has caused a sharp drop in the amount of VIP visitors to the region. For LVS, this restriction has been a blow to their gaming turnover. From 2014 until 2016, the company is projected to lose almost 42% of this revenue. Macao’s crackdown means that VIP customers are more hesitant to visit casinos there, and if they do, are more cautious when it comes to spending large amounts of money.

Macao Outlook Not Friendly for Casinos

Macao has also recently instituted other policies that have had or are projected to have a negative impact on the overall hotel and casino industry. The region recently enacted an indoor smoking ban that many have seen as a negative incentive for tourism. The Chinese government also recently announced restrictions on travelers coming to Macao from the Chinese mainland. Together, these recent regulations have had an overwhelmingly negative impact on Macao’s major industry. Visitor arrivals dropped by 3.8% in July, while same day visitors were down 6.4% for the month. On a year-to-date basis, this adds up to a 3.5% drop to 17.4 million visitors.

Further deepening Macao’s—and LVS’—problems is the current downturn in China’s economy. This situation has compounded the financial instability in the area driving valuations lower for most major players in the hotel, restaurant, and leisure business. It also served to kill what appeared to be the beginnings of a rebound for Macao’s gaming industry. Macao’s gross gaming revenues have dropped more than 35% year to year since February, while its overall GDP dropped 25% in the first quarter of 2015. Companies operating in Macao have seen 14-straight months of revenue declines with most experiencing a strong reaction in their share prices. For LVS, this this is reflected by the company’s shares trading at a 28% discount compared to 52-week high, with risks still biased to the downside.

The Dividend Remains the Same

Despite the current financial climate in the industry, the company has continued its ambitious 10% annual dividend increase while assuring investors it can continue to pay out the quarterly dividends from its cash flow, as opposed to depending on borrowing money to do so. However, at the company’s current position, continuing this increase in dividends and payouts would cause them to burn about $2.84 billion in cash before their capital expenditures drop enough to be able to handle the dividend payouts comfortably. There is, however, some room for optimism in LVS. Even with concerns about the company’s cash flow, they have been able to raise their quarterly dividend to $0.65, with a projected raise to $0.72 quarterly by 2016.

Las Vegas Sands maintains the largest market share of the casino industry in Macao, with 24%, a number that could be boosted by the openings of the Parisian and St. Regis Towers, projects that will add thousands of new rooms and venues for conventions and events. The company has also been able to slightly break free of casino revenues, expanding their mall revenues for the past two years while also building a healthy meetings, incentives, conferences, and exhibitions business that helps maintain the company’s hotels at 83% occupancy. Despite a drop from the high of 89%, this is still better than the Macao average of 79%. While LVS shares have stood up well in the face of economic downturns, the company does still face downside risks to share prices despite the intention to keep the dividend intact.

The Strategy

The downturn in Macao in particular is not expected to ebb in the near future and with broader financial markets taking a tumble, LVS is unlikely to remain immune from broader market forces.  Although the price-to-earnings ratio is sitting at a more comfortable 16.07, a further 25% drop in price could be possible considering the macroeconomic environment in spite of gambling’s resilience during downturns.  With this in mind, the key strategy remains fading upticks in the shares and any rallies higher as investors begin to prepare for a bear market.  The target for Put positions is support at $45.33 per share with any break of $44.73 paving the way towards levels last seen at 2012 at $40.92.  A break above resistance at $47.67 could see holders of Call positions benefit from momentum higher towards $50.14.

Conclusion

On a longer-term basis, Las Vegas Sands has positioned itself well to be at the center of a major global gaming hub by increasing market-share and expanding into other businesses outside of gaming.  Overall, faith in Macao’s ability to rebound despite the weak Chinese economy might see shares picked up at a steeper discount in the near future, proving a boon for value and dividend investors.  However, prices have taken a steep drop in the past few weeks and the downtrend looks set to continue, meriting Put positions in the near-to-medium term. LVS could prove useful shares to buy cheap and keep for dividend income, but intraday traders will be hard pressed to capitalize on this value.