Las Vegas Sands Stuck in the Mud

06/14/2007 12:00 am EST

Focus:

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says the high-flying casino operator has stepped into a buzz saw of competition in Macao, where rising costs may cast a shadow over the opening of its new Venetian.

When Las Vegas Sands (NYSE: LVS) opened the $300-million Sands Macau Casino back in May 2004, it made back its investment in less than a year. The casino had no hotel rooms and few slot machines, but despite this, it made far more profits than the Venetian in Las Vegas, which cost four times as much to build! When the Sands Macau opened, it broke local casino mogul Stanley Ho's 30-year monopoly on the former Portuguese colony's casino business.

Last year, LVS made $1.3 billion from Macau, and it's still the best play in the only city in the Chinese-speaking world that allows legalized gambling. Since mid-March 2006 when I first recommended LVS, the stock doubled from $50 to more than $100 in January.

However, the stock has since pulled back [amid] increasing concerns that the area may be getting too many new competing casinos. In the past nine months, four high-end new casino complexes entered the Macau casino market-the $1.2-billion Wynn Macau, Galaxy's StarWorld, Stanley Ho's new 52-story luxury casino resort Grand Lisboa, and Melco PBL's new Crown casino complex. Currently MGM Mirage is building its own $1-billion MGM Grand Macau. Plus, Las Vegas Sands is preparing the Venetian Macau for a late August opening.

Competition in Macau is indeed intensifying. LVS's growth in Macau slowed and lagged the pace of the gaming industry as a whole. Though the pie is getting bigger, LVS is getting a smaller slice by losing market share to new entrants.

My second worry is LVS's declining profit margin due to increased costs [and] competition [as] strong demand for experienced casino workers is bidding up employee expenses [in Macau]. While the company's revenues surged 18% in the first quarter, profit dropped 25%.

Meanwhile, [in order to finance] construction projects, LVS borrowed $2.5 billion for Macau and $1.4 billion for the Marina Bay Sands in Singapore. In the first quarter, it paid $34.6 million just in interest, 62% higher than a year ago.
I still think LVS is an excellent company, but with new casinos cropping up so quickly, LVS is facing a classic case of over-competition. Given the company's slowing growth rate, falling profit margin and high P/E ratio of [nearly 40x trailing-12-month earnings], the stock is vulnerable to a substantial pullback at this point. (The shares closed around $77.50 Wednesday-Editor.)

For the past year, the share price of LVS has surged on speculation about the Venetian resort in Macau. Now that the casino is completed and nearing its grand opening, it's the right time to take profits in the stock. I'll continue to watch the stock closely, and if the fundamentals improve, we might come back to Las Vegas Sands in the future.

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