We are initiating coverage on Las Vegas Sands Corp. (LVS), the leading international developer of multi-use integrated resorts primarily in the United States, Macau, and Singapore, with a Neutral recommendation.
The Nevada-based company reported second quarter 2011 earnings above the Zacks Consensus Estimate, driven by company’s strong business in Macau, outstanding performance of its new resort in Singapore and improved Las Vegas business. Adjusted earnings of the company came in at 54 cents per share, above the Zacks Consensus Estimate of 44 cents. Quarterly revenues surged 47.1% year over year to $2.35 billion.
Macau is becoming the largest gaming market in the world. The company primarily derives its revenues from its Sands China property portfolio in Macau. Macau, the only Chinese city where gambling is legal, has handled the economic downturn relatively well. The gaming volume in Macau continues to remain healthy due to strong tourism. GAAP total net revenue was up 16.3% in the second quarter of 2011.
Adjusted property EBITDA margin also expanded to a market leading level of 33% due to higher margin mass table and slot businesses as well as significant contribution from the important non-gaming (hotel, retail and convention) components. We also expect the company to benefit from a management churn at its Macau operations.
In the near term, Las Vegas possesses the Sands Cotai Central resort project in the pipeline. The resort will open in two phases and we are positive about the project as it is coming up in Cotai, which has great growth potential, and the upcoming project will represent the next phase in the company’s Macau strategy.
Las Vegas Sands also continues to benefit from its positioning in Singapore, the fastest growing gaming market in the world. We believe that the opening of a property, Marina Bay Sands, in Singapore appears to be the best future growth opportunity for the company. We expect visitation to be up significantly in the coming quarters, with the property fully developed including high quality non-gaming amenities and convention business beginning to ramp.
Moreover, Singapore is poised to grow as the areas surrounding Singapore have good long-term growth prospects. Additionally, with the strength in Asian markets, we expect the property to continue generating outstanding returns for the company. Net revenue in the second quarter was $737.6 million and adjusted property EBITDA margin was 55.0%, reflecting strong gaming volume growth in each segment.
Moreover, its Las Vegas business, which worst affected during the slowdown, is also steadily improving. However, the upside might be impacted given the excess capacity in the market. Additionally, we remain cautious on the stock due to stiff competition from Wynn Resorts Limited (WYNN) and MGM Resorts International (MGM) and heavy reliance on debt financing and capital market for development.
Furthermore, the growth and profitability of the company might also be adversely impacted by reductions in discretionary consumer spending due to challenging economic conditions, resulting from a high unemployment rate and a tight credit market.