Las Vegas Sands 2Q profit down on Macau weakness
U.S.-based casino operator Las Vegas Sands Corp reported a 30-percent drop in company wide second quarter profit, on a poorer year-on-year performance from its Macau unit, Sands China Ltd. But the Macau operation showed sequential improvement in its margins compared to the first quarter.
Group-wide, on a U.S. generally accepted accounting principles (GAAP) basis, Las Vegas Sands’ net income for the three months ended June 30 decreased 30.1 percent year-on-year to US$469.2 million, the parent said on Wednesday. Diluted earnings per share in the second quarter of 2015 decreased by 28.9 percent from the prior-year period to US$0.59.
The decrease in group net income reflected the decline in group operating income, which was down 28.3 percent year-on-year to US$689.3 million, the company said.
“The decrease in operating income was principally due to softer results across the company’s Macau property portfolio,” Las Vegas Sands said in Wednesday’s filing.
Company-wide net revenue for the second quarter of 2015 decreased 19.4 percent US$2.92 billion, compared to US$3.62 billion a year earlier. Analysts had estimated second quarter revenue of about US$3 billion.
Consolidated adjusted property earnings before interest, taxation, depreciation, and amortisation (EBITDA) decreased 22.6 percent year-on-year in the second quarter of 2015 to US$1.02 billion.
“While the operating environment in Macau, particularly in the high-end gaming segments, remained challenging during the quarter, our focus on the higher margin mass and non-gaming segments and the geographic diversification of our cash flows allowed us to again deliver in excess of one billion U.S. dollars of adjusted property EBITDA during the quarter and weather this cyclical downturn better than the industry overall,” Sheldon Adelson, the company’s chairman and chief executive, said in a statement accompanying the results.
“Despite the current headwinds in the Macau market, we remain sharply focused on the consistent execution of our global growth strategy,” he added.
In Singapore, where Las Vegas Sands developed and operates the Marina Bay Sands, adjusted property EBITDA was US$363.3 million in the second quarter. On a constant-currency basis that was down 6.4 percent from the prior-year quarter, the company said.
Casino revenue at Marina Bay Sands fell 12.5 percent year-on-year to US$565.7 million in the three months to June 30.
Macau cost controls
On a GAAP basis, net revenue for Macau-based Sands China fell by 25.6 percent from the year-prior period to US$1.77 billion in the second quarter of 2015.
Net income for Sands China decreased 37.3 percent from a year earlier to US$388.7 million in the second quarter of 2015.
Adjusted property EBITDA for the Macau casino operator fell 29.5 percent year-on-year to US$564.5 million in the April to June period.
The company’s adjusted property EBITDA margin however expanded to 31.7 percent versus 30.0 percent in the first quarter, “exhibiting prudent cost control discipline in a challenging macro-environment in Macau,” said a note on Thursday from Sanford C. Bernstein Ltd in Hong Kong.
Las Vegas Sands said that on a hold-normalised basis the EBITDA margin improvement for Sands China was 150 basis points.
“In the near-term, we expect management to continue its focus on cost discipline while Macau market looks to bottom and stabilise,” said Sanford Bernstein analysts Vitaly Umansky, Simon Zhang and Bo Wen.
Las Vegas Sands’ Mr Adelson cited cost controls and a focus on higher-margin, mass-market players in the Macau market as factors in EBITDA margin improvement.
“Against concerns of a margin decline, luck-adjusted EBITDA margin +150bps quarter-on-quarter to 31.7 percent. On call, management cited key cost rationalisation in non-local staff costs, comps and marketing expenses,” Karen Tang, an analyst at Deutsche Bank AG in Hong Kong, said in a note on Thursday.
Ms Tang added: “We see Sands’ [China] second quarter margin resilience as truly remarkable, but company-specific. Reading across, we still expect margin decline for the other [Macau] operators which have less room for cost rationalisation.”
Ms Tang said she expects Sands China to lose share in the second half of 2015. “We think most cost rationalisation had been implemented, we think Sands [China] will find it tough to sustain margin at this level,” she added.
The Macau casino operator confirmed that it has reallocated resources from VIP areas operated by junkets to premium mass and mass areas. According to Deutsche Bank, Sands China’s “base mass revenue fell sequentially more than premium mass revenue (-4 percent quarter-on-quarter vs -2 percent quarter-on-quarter; -18 percent year-on-year vs -27 percent year-on-year)”.
“Management explained that, since junket business had shrunk, they reallocated a nice gaming area in Plaza casino (and more Four Season rooms) from junkets to premium mass and direct VIPs. Second quarter direct VIP roll (+3 percent quarter-on-quarter) was thus more resilient than junket roll (-15 percent quarter-on-quarter),” said Ms Tang.
Non-gaming pressure
Sands China’s non-gaming net revenue grew by 2 percent year-on-year, as retail remained resilient but hotel occupancy was weak. The company reported hotel occupancy of 80 percent in the three months to June 30, down from 83 percent in the first quarter.
“ADR [average daily revenue] fell -10 percent quarter-on-quarter (-8 percent year-on-year), reflecting a more competitive market where hotel operators are increasingly selling rooms for cash as demand from VIP for rooms has declined and the market has yet to adjust fully,” said the Sanford C. Bernstein team.
Macau retail operations generated total gross revenue of U$94 million, up about 21 percent year-on-year. The company however highlighted that the luxury watch and jewellery segment was weak during the reporting period.
“There may be some pressure on retail over the next few quarters as tenant sales per square foot are showing some signs weakness, turning negative quarter-on-quarter (due to weakness in luxury retail sales),” said the analysts at Sanford C. Bernstein.
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