Barons: Macau Casinos: What to Expect Heading into Earnings 4/16/2013
Macau’s casino stocks have had a great run heading into their earnings announcements during the next few weeks. Does that make them a big gamble?
Reuters: Las Vegas Sands (LVS), which is scheduled to release earnings on April 25, has gained 16.8% this year, while Wynn Resorts (WYNN), which is scheduled for May 6, has returned 11.2%. Melco Crown International (MPEL) has gained 33.4% and MGM Resorts International (MGM), which is scheduled to release on May 3, brings up the rear with a 5.4% gain.
RBC Capital Market’s John Kempf says go with the momentum. He writes:: As we approach first quarter earnings, we remain biased towards Macau exposed gaming stocks (LVS, MPEL, WYNN & MGM)….Gross gaming revenue in Macau outperformed expectations in the first quarter of 2013 and has been the primary catalyst for share price out performance in the period. Improved sentiment and revenue growth have driven shares close to new 52-week highs. Despite the solid run in the past few months, we still favor the Macau operators (LVS, MPEL, WYNN, MGM) heading into Q1 earnings and believe there is further upside from positive estimate revisions.
Still, investors should dial back their expectations, Kempf says. He writes:
Looking ahead, we remain positive on the Macau market but we also believe it is prudent to set conservative expectations for the remainder of the year, especially on the VIP side given the recent “resurgence” in this segment. We are estimating that market wide gross gaming revenue will increase 10.7% over 2012, with mass growth in the 20% range and VIP in the mid-single digit range.
LVS remains a favorite:
We estimate that LVS continued to pick up share in the quarter as the company benefited
from the ongoing ramp at Sands Cotai Central. In fact, LVS was the only company that gained
share over the prior year’s quarter. We would expect this to continue throughout 2013 given
the company’s critical mass on Cotai and significant number of hotel rooms for accomodation.
While it’s true that Sands was ramping up the final components of “Cotai Central” during Q1, it’s instructive to note that many attributes of the ramp were not in place for much of Q1. The final 2,000 Sheraton Towers hotel rooms were unavailable until almost February, the walkway bridge over the strip was not yet open for the first half of january, the new 200 gaming table allocation wasn’t available until early february and certainly not optimized or fully deployed in time for Lunar New Year. The new high-speed train into the region was also not fully ramped until weeks into the quarter.
It’s also important to note that many of the ways that Cotai Central will leverage Venetian’s vast, underutilized capacities won’t really be optimized until the current, Q2 timeframe. For example, Venetian’s 15,000 seat arena was difficult to fully book when the Cotai Strip could barely house half of the arena’s capacity with available hotel rooms… Cotai Central changes that, and booking agents are now favoring the Venetian arena over competing venues in Hong Kong.
One might also note the concept that gamers “play where they stay”. Prior to Cotai Central, large portions of attendees of Conventions and MICE events at Venetian were forced to book hotel rooms downtown so they would typically return to their hotels after convention activity ended and visit the casinos there. Cotai Central now captures those patrons with it’s 6,000 hotel rooms so that all of their gaming activity remains in central Cotai.
It generally takes the better part of a year to fully ramp a major gaming resort. The substantial “critical mass” elements present on Cotai may well extend that ramp into 2014… particularly for major Arena shows…
… and it’s noteworthy that 2014 is STILL almost 2 years ahead of the completion of any other major Macau resort construction, with probably the one exception of Galaxy’s phase II development… which is, like everything else on Cotai, “adjacent” to the Venetian.
I might add that with Las Vegas Sand’s stock virtually flat-lined for the past 2.5 years, and Cotai Central now fully open and ramping up the question that any prospective LVS investor must ask is…
… if Sands China advances to a 24 to 25% market share in a macau that grows it’s gaming volumes by 12 to 16% this year, is this a stock that’s really valued correctly in the low $50s?
Anybody who really knows what 2012′s EPS for this company is actually comprised of isn’t somebody who is buying off on the idea that it’s trailing P/E is anywhere near 29x. Just “normal” gaming luck alone at Marina Bay in Q4 would have landed LVS’s earnings more than 10 cents a share higher. Sands China’s revenues easily beat it’s progress with EBITDA simply because the pre-opening expenses of un-opened Cotai Central phases were being booked against the revenues of only the phases that were operational…
… I doubt you could find another NYSE company who’s 2012 results are less of a proxy for what’s anticipated for 2013.