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Cost Efficiencies Boosts Las Vegas Sands' Q2 Macau Margins, As Mass Gaming Drives Future Growth

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Las Vegas Sands recently reported its Q2 2015 earnings, which came in 30% lower compared to the prior year period. This was very much on expected lines given the massive decline the Macau market has seen during the quarter. However, the company managed to post an improvement in Macau EBITDA margins, primarily led by cost efficiencies. LVS has been aggressively targeting the mass-market gaming and has been reducing its reliance on VIP business for profits. This is good as mass-market does not involve junket operators, thereby offering higher margins. We maintain our bullish stand on Macau and Las Vegas Sands and expect the mass-market gaming to drive growth in the medium-to-long run, led by buoyant growth in China's middle class, which will boost visitation from Mainland China to Macau. We currently estimate the 2015 EPS to be around $3.09 and have a $60 price estimate for Las Vegas Sands, which we will soon update to incorporate the second quarter earnings.

Cost Efficiencies Boost Macau EBITDA Margins

A decline in Macau gaming led to 26% lower revenues and 30% drop in EBITDA for Sands China during the quarter. However, the reported Macau EBITDA margins improved sequentially by 200 basis points to over 32%. Also, the company's management stated that there is further room for margin expansion in future. On the VIP and premium mass front, the company is pushing for direct credit to some of its customers, thereby bypassing the junket route and improving its margins. While there is a risk involved in this, the company's management stated that it is currently targeting only highly creditworthy customers with clean compliance records. It must be noted that the company has been following the direct credit route on a larger scale in Singapore and the casino margins are comparatively higher than that in Macau.

Looking at the Macau market, it has been on a decline for 13 straight months led by the government's anti-graft measures. However, of late, there have been few positive developments, such as relaxation of visa regulations, which could bring in a recovery in the market. An uptick in gaming is long anticipated and yet we wonder when the casinos will see gaming growth return in Macau. Having said that, we believe that the casinos will do well in the medium to long run, primarily led by growing middle class of China, which will fuel the Mainland China visitation to Macau. China's GDP per capita is expected to grow to over $12,000 by 2020 as compared to $7575 in 2014. The Mainland China visitors to Macau are also on the rise and have grown from around 13 million in 2010 to over 21 million in 2014. We currently estimate Las Vegas Sands' gross gaming revenues of over $14 billion and EBITDA of around $5 billion by end of the decade, representing 60% of the company-wide EBITDA (see – What Factors Can Drive Las Vegas Sands' Stock Price?).

Singapore Operations EBITDA Grows On A Constant Currency Basis

Las Vegas Sands' Singapore casino revenues were down 13% to $566 million in the second quarter. While the rolling chip volume declined 9% and non-rolling chip volume was down 5%, the non-rolling chip win percentage was higher at 27.5% as compared to 24.8% seen in the prior year period. Overall Singapore revenues were down 11% to $713 million while hold-normalized EBITDA was down 1% for the quarter. However, the decline can be attributed to currency volatility and on a constant currency basis, the hold-normalized EBITDA was up 6% for the quarter. We don't expect any significant growth in the company's Singapore operations in the near term due to a decline in international visitors and the currency issue. International visitation from nearby countries has slowed somewhat because of the unfavorable currency trends. Accordingly, we estimate Singapore revenues (excluding food, convention and others) to remain stable at around $3 billion and EBITDA of $1.5 billion in 2015, representing around 30% of the company-wide EBITDA.


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