Estimates going lower but sell side clinging to the healthy mass thesis. We’re worried about decelerating 2H mass growth, more competitive market conditions for premium mass, and the difficult Singapore macro environment.
THE CALL TO ACTION
We remain negative on the Macau operators as a whole based in part to our mass decelerating theme - the bad VIP/good mass thesis is so yesterday. The LVS release highlighted additional issues facing the operators. Mass margins were disappointing and we wonder if the premium segment is getting more competitive – a thesis put to us by more than one source during our June Macau tour. Promotional expenses were higher than expected. Labor expenses are likely to rise as Macau unemployment remains extremely low in the face of a lot of new supply. LVS initiated a “preemptive strike” but retention bonuses may become the norm. Finally, MBS is facing a very difficult macro environment which wasn’t discussed on the call but should result in lower EBITDA estimates going forward.
Our earnings preview highlighted that LVS was the Macau company we thought would miss even reduced expectations and they didn’t disappoint – well, they did disappoint the overwhelmingly bullish Street. In fact, LVS missed our below-the-Street projections across the board. How did they do it? They double dipped on revenues and margins. Revenues missed the Street by $175m (Hedgeye by $72m) and EBITDA fell $83m below the Street (-$45m vs Hedgeye).
As we pointed out, in our 07/15/14 note, "SINGAPORE: MALIGNANT MACRO" the deteriorating Singapore environment was likely to pressure MBS volumes in Q2 – it happened – and going forward as well. We’ll see where the Street shakes out but we lowered our projection. More surprising were the lower margins in Macau which management blamed on mass mix shift to lower margin premium mass. We’ve been worried about the potential for lower margins in premium mass as mass revenue growth decelerates and the competitive environment escalates. Could we be seeing that already? The upcoming earnings releases by LVS’s competitors will be telling.
We remain below the Street for 2H 2014 in Macau and Singapore. Our full year company EBITDA estimate is $5.39 billion while EPS checks in at $3.68.
Marina Bay Sands
Marina Bay Sands reported Gross Gaming Revenues of $785m, a 1% YoY increase thanks to high hold of 3.45%. We computed on a hold-adjusted basis that EBITDA would have been $365m. Based on our analysis of trends in reported betting taxes, we believe Singapore GGR was flattish in Q2. Thus, we expect Resorts World Sentosa to also report flattish GGR on slightly higher hold.
But we are concerned about MBS and Singapore on several fronts:
- As we pointed out in our note, “SINGAPORE: MALIGNANT MACRO” (7/15/14), the macro environment have deteriorated significantly in the city-state.
- VIP rolling chip volume has plunged for three straight quarters. Adelson’s comment about higher hold has some validity but probably not overly material. Just look at Q4 2012 when MBS only held at 1.92%, whereas VIP volumes fell 17% YoY. Or check out Q1 2012 when MBS played very lucky at 3.58% on top of 26% growth in VIP volumes.
- Mass volume dropped for the 2nd straight quarter. Mass has been stuck in the $1.1-$1.2bn roll.
- Q2 REVPAR declined for the 1st time QoQ due in part to more rooms
- Tightening of VIP credit
- While provision for doubtful accounts was ok in Q2 at $33m or 4.2% of GGR, it may pick up as lending dries up.
- Continued government scrutiny over local casino visitors
Here are some interesting details regarding LVS’s other properties:
- Table drop fell 20% YoY, its worst performance since Q2 2002
- Rebates as a % of GGR fell to 3.6%, lowest since Q4 2012
- Despite 170 less slot machines, slot volume continued to do well, hitting a new quarterly record of $832m in Q2 2014
- Mass volume beat our estimate by 13%, rising 32% to $1.08 bn
- Mass hold fell to 17.5%, the lowest hold since 2005
- Fixed costs rose 49% YoY
- Although mass volume slipped 7% QoQ, it was better than what we estimated
- Fixed costs were $12m higher our estimate, contributing to a 80bps margin decline
- Promotional expenses as a % of non-gaming revenues was 29%, unchanged from Q1 2014 and the highest level seen at the property
- Surprisingly, slot volume fell 6% to $170m, which was offset by higher slot hold (6.5%)
- Mass volume skyrocketed for the 5th straight quarter, +97% YoY.
- Mass hold was 21.9%, the lowest level since 2008
- VIP revenue missed our estimate as VIP hold was 3.08% for Q2, with an estimated 19% of Direct VIP volume
Sands Cotai Central
- Mass came in a little lighter than expected
- Mass hold has been steady since ramp in Q2 2012
- Added 33 tables in the quarter to 495 tables