LVS: NOT AS BAD BUT NOT AS GOOD EITHER

It’s important to take into account the fact that hold was low but we differ with management on the impact.

LVS was trading below $40 last night after hours following a disappointing earnings release.  If you trade at 14x EBITDA, your margin for error is slight.  We haven’t exactly been a cheerleader for this stock but we have to admit that a 15% total decline yesterday was a bit excessive.  April is off to a great start in Singapore and while LVS’s Macau market share was substandard in April, the market was off the charts.

To be clear, however, the stock should be down.  While hold was low in Singapore and Vegas, management’s estimate of a $40 million negative impact looks very aggressive to us.  In fact, we estimate the total impact across the properties was only $13 million.  Thus, this was a genuine miss due to Vegas and Singapore.

OVERALL TAKEAWAYS

• We don’t believe the negative hold impact across LVS’s portfolio was nearly as severe as management presented.  We estimate that net revenues actually would have been $3MM LOWER and EBITDA would have only been $13MM higher had hold been normal across their portfolio.  Here are our estimates by property.
  • Low hold only impacted Vegas EBITDA by $5MM and net revenue by $20MM
  • In Macau, high hold helped net revenues to the tune of $52MM and EBITDA by $18MM
  • At MBS, we estimate that hold impacted revenues by $29MM and EBITDA by $26MM
• Costs were tightly controlled if not reduced everywhere but at MBS
• Promotional expenditures were cut across the entire portfolio with good results everywhere but Vegas
• While we can’t confirm that LVS is making much progress on growing its junket share in Macau, direct play as a percentage of RC certainly took a dive this quarter
  

LAS VEGAS

LVS reported $305MM of net revenues and $65MM of EBITDA, missing our estimates by 15% and 44%, respectively and missing the consensus by 9% and 34%, respectively.

At least vs. our estimates, the revenue miss was entirely on the casino side.  Non-gaming revenues net of promotions and discounts were actually $3MM ahead of our estimate as lower room revenue was offset by a material reduction of comps.  While management tried to promote the success of their strategy of sharp reductions in promotional allowances, the results clearly speak for themselves… and frankly, they stink.

• Net Casino revenues came in $58MM below our estimate
  • The average hold in Las Vegas for LVS has been 18.1% over the last 8 quarters.  If we use the 8 quarter average, table win would have been $23MM higher. If we use last year’s hold rate of 18.9%, table win would have been $26MM better. Either way to get to the $45MM impact LVS claims that hold had on the quarter, we’d have to assume 22.75% which is far from the 3 year average.  In fact, there have only been 2 quarters since 2008 that the company has seen a hold rate north of 22%.  We estimate that the EBITDA impact was about $6-7MM (gross table win – Nevada gaming tax – drop * rebate rate)
  • Drop fell 13% YoY but to be fair, 1Q2010 was a difficult comp as table drop grew 23% YoY.
  • Slot drop was clearly negatively impacted by the cut in promotional spending, plummeting  36% YoY on an easy -10% comp.  Slot results would have been even worse if not for high hold of 8.5% which benefited slot win by $2.6MM.
  • On the net, we think that low hold only hurt LVS by the tune of $20MM in gross gaming win and by less than $5MM on EBITDA
• Total operating expenses increased by 9% YoY or $20MM in Las Vegas to $240MM

 MACAU

• We’re not sure how much traction LVS is making on the junket front, but direct play as a % of RC declined to 19% of RC vs. 24.4% in 2010.
• Fixed costs/commissions were lower than we expected and down YoY, despite last year being a year of cost cuts.
• As in Vegas, LVS took a knife to promotional spending – although with clearly better results

Sands

Sands Macao’s revenues came in $9MM below our estimate.  However, property reported EBITDA of $92.6MM was $5MM above our estimate due to a combination of lower fixed expenses, lower taxes on lower win, and higher table win rate due to lower mix of direct play.

• Gross and net VIP table win were $9MM lower than our estimate due to $500MM lower RC volume than our estimate
  • Direct play was only 10% of total RC in the quarter vs. an average of 14% over the last 3 quarters
  • Hold was 6 bps better than we estimated
  • The rebate rate was 91bps vs our estimate of 86bps (or 33% of hold)
  • Low hold impacted gross and net VIP win by $8MM and $6MM respectively and EBITDA by about $3MM.
• Mass table win was $3MM below our estimate due to drop being $100MM less than we estimated. Drop grew 13% YoY.
• Slot win was $2.5MM above our estimate due to higher handle and a higher win rate
• Non-gaming revenue net of promotional expense was in-line with our estimate
• Implied fixed expenses declined $6M or 7% YoY to $42MM

Venetian Macau

Venetian’s net revenue of $638MM was 2% below our estimate but a combination of lower commissions and lower fixed costs led to the property reporting EBITDA that was 9% better than we projected.  If table hold for both Mass and VIP was ‘normal,’ we estimate that net revenues would have been $14MM lower and EBITDA would have been $5MM lower.

• Net gaming revenues were $5M below our estimate
  • Gross VIP revenue was $5MM below our estimate and net was $8MM lower than our estimate
  • RC was $400MM or 1.5% lower than we estimated
  • Direct play was 19% of RC
  • Hold was 3bps below our estimate
  • The rebate rate was 84bps or 31% of hold
  • Low hold negatively impacted gross VIP revenues by $20MM (net by $14MM) and EBITDA by approximately $10MM
• Mass table win was $5MM above our estimate
  • Mass drop only grew 6% YoY however, table hold was a ‘healthy’ 27.9%
  • The 8 quarter average hold for Venetian is 25%.  Assuming a 25% hold rate, Mass win would have been $28MM lower and we estimate that EBITDA would have been negatively impacted by approximately $15MM
  • Slot win was $2MM below our estimate due to a lower win rate
• Net non-gaming revenues was $8MM lower than we projected primarily due to lower room and retail & other revenue, partly offset by lower promotional spending
• It appears that junket commissions were lower this quarter and that fixed expenses decreased to $85MM from a run rate of approximately $100MM
• Non-gaming, net of promotional expenditures were $8MM below our estimate

Four Seasons

Four Seasons net revenues beat our estimate by $4MM and EBITDA by $8MM.  Direct play declined materially, and hence hold was a lot a better than we expected and fixed costs were lower.  High hold across Mass and VIP tables benefitted FS to the tune of $50MM and $16MM, respectively.

• Net gaming revenues were $13.5MM above our estimate
  • Gross VIP table revenues were $1MM above our estimate and net revenues were $13MM better
    • Drop was $900MM below our estimate due to a much lower mix of direct play- 40% vs. our estimate of 50% (compared to 54% in 4Q10)
    • As a result of lower drop, we underestimated the win rate by 73bps
    • Despite the high win rate, the rebate rate was only 97bps
    • We estimate that high hold benefited revenues by $41MM and EBITDA by $11MM
  • Mass table revenues were in-line with our estimate but the win rate was much higher and drop was disappointing
    • Mass drop actually fell 17% YoY
    • Even if we use the property's high 12 month trailing average hold of 29.1%, we still get to a benefit of $9MM on net revenue and $5MM on EBITDA.
• Net non-gaming revenue was $10MM lower
• Implied fixed expenses declined 3% YoY to $19MM

SINGAPORE - MARINA BAY SANDS

MBS net revenues were in-line with our estimate but EBITDA was 11% lower than we projected due to higher costs as new amenities opened and had yet to fully ramp and higher receivable reserves. 

• Net VIP revenue was $3MM better than we estimated due to better RC volume and lower rebates
  • RC grew a whopping 24.5% QoQ
  • Rebates were 1.24% in the quarter compared to 1.31% in 2H2010
  • Assuming 2.85% hold for MBS, we estimate that low hold negatively impacted revenue by $29MM and EBITDA $26MM (close to LVS’s estimate).  We would argue that 2.8% is a better ‘normal’ rate to use given the different mix of games and the lower average hold experienced by the property thus far.  Under this scenario the negative hold impact would have been $24MM and $22MM on revenues and EBITDA, respectively.    
• Slot revenues were $3MM below our estimate due to lower hold – probably due to a higher mix of EGT machines
  • MBS added 333 slots QoQ
  • Slot handle increased 11% QoQ
• Mass revenue was $7MM lower than we estimated due to lower drop growth, somewhat offset by better hold
  • Table drop grew 5% QoQ
• Net non-gaming revenue was $6MM above our estimate due to lower promotional expenditures
• Even after taking into account higher doubtful accounts, we estimate that implied fixed expenses increased to $182MM from $153MM.

Other stuff:

• Sands Bethlehem was spot in-line with our revenue and EBITDA estimate
• Other Asia ops are losing less money
• D&A was $5MM higher vs. our estimate
• Rental expense was $2MM higher vs. our estimate
• Corporate & stock comp jumped to $46MM, up $6MM QoQ and 58% YoY
• Net interest expense was $7MM below our estimate