No company has benefited from the growth in Asia's gaming market as much as Las Vegas Sands (NYSE: LVS), the one casino operator with a gaming license in both Macau and Singapore. The company has the largest market share in Macau and has spent billions building out hotel and casino capacity.
The problem is that Macau's gaming revenue is starting to decline and there's fear that China's economy could be headed for a recession. And if that happens, it's Las Vegas Sands that has the most to lose.
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A heavy reliance on Asia
In the first quarter of 2019, 59% of Las Vegas Sands' adjusted property earnings before interest, taxes, depreciation, and amortization (EBITDA) came from Macau; 29% came from Singapore and just 12% was from the U.S. You can see that the company relies very heavily on Asia to drive results.
In both Macau and Singapore, Las Vegas Sands' results hinge heavily on mass-market players rather than VIP high rollers. Over half of Sands' profits come from mass-market tables or slots in the two regions, which is quite a bit more than what you'd see across the entire Macau market. There, about two-thirds of gaming revenue comes from VIPs, leaving just one-third for mass-market players. If a recession hits China, or Asia more broadly, Las Vegas Sands doesn't have the high-end customers to lean on that its competitors do.
Macau is already faltering
If you're looking for cracks in Asia's gaming market, they may already be showing. Macau's gaming revenue is down 2.4% so far in 2019, and April was the worst month year to date with an 8.3% decline.
On top of that, all of the other five concessionaires in Macau have either recently completed a new resort or are building an expansion. That'll spread the market even thinner and will likely reduce profits for each resort.
China is Las Vegas Sands' biggest risk
With so much reliance on Asia, the biggest risk for Las Vegas Sands is that China and/or Asia more broadly could go into a recession. We aren't there yet, but analysts are starting to worry that decades of growth and a lingering trade war with the U.S. will eventually push China into a slowdown. If that happens, spending on gambling by every segment of the market will likely drop.
What we don't know is how much gaming revenue could drop in a recession. The only data point we have is a nearly 40% drop in gaming revenue from 2013 to 2016 that resulted from China's crackdown on corruption and money laundering. If a simple crackdown can cause a drop like that, we may see a very substantial drop in a recession.
What to watch from Las Vegas Sands
As 2019 wears on, investors should watch China's economy closely for signs of a slowdown. If the economy slows, it will likely bleed into Macau's monthly gaming numbers, which will ultimately drive revenue for Las Vegas Sands. I don't think it's time to panic about Asian gaming stocks, or Las Vegas Sands in particular, yet, but knowing the immediate risks of any investment is important, even for long-term investors.
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