A recent news line from CNBC read, “Las Vegas Sands (LVS, Financial) missed estimates by 18 cents with adjusted quarterly earnings of 45 cents per share, and the casino operator's revenue was also below forecasts. The company's results were hurt by weaker Las Vegas results as well as the ongoing downturn in Macau.”
As the market closed that day, April 20, Las Vegas Sands shares went down roughly 9%, while Sands China (SCHYY, Financial) slumped 7.43%. Standard & Poor's 500, on the other hand, had a minor retreat of 0.44%. Further data revealed that Las Vegas Sands delivered $2.72 billion in its first-quarter 2016 sales. That figure was 9.6% lower than last year’s first-quarter numbers.
Given the statement above, a prospective investor would be eager to determine the relationship between Las Vegas Sands and Sands China financially.
Ownership structure
(Gurufocus Insider Information)
Interestingly, the wife of  Las Vegas Sands founder Sheldon Adelson, Miriam Adelson, has a huge stake in Las Vegas Sands, roughly 12%, of shares outstanding, while Sheldon Adelson has 8.3% ownership.
(Miriam Adelson, source)
According to Reuters, Miriam Adelson had attained a stake in Las Vegas Sands mostly from gifts (see image below). Besides the gifts, Miriam Adelson had also exercised an option back in 2012 that gave her a cost per share of just $6 when Las Vegas Sands closed $54.8 that day.
(Reuters)
The Sands China-Las Vegas Sands Connection
According to page 3 of Las Vegas Sands' recent 10-K (source), Las Vegas Sands owned 70.1% of Sands China. The properties under the ownership of Sands China were as follows: The Venetian Macao Resort Hotel (“The Venetian Macao”), Sands Cotai Central, the Four Seasons Hotel Macao, Cotai Strip (the “Four Seasons Hotel Macao”), the Plaza Casino, the Sands Macao and the soon-to-open The Parisian Macao. These are six, soon seven, beautiful properties, even when viewed from afar.
(The Venetian Macao, Google Image).
More news
This time news came from the land of the Red Dragon pertaining to Sands China’s business operations. These are some of the following highlights from the April 22 article titled “Sands China Misses Forecast on China” (source):
- Sands China’s adjusted property earnings before interest, taxes, depreciation and amortization shrank 2.5% to $517.9 million from $531 million a year earlier.
- “Macau has seen tightened money flows as the $30 billion casino industry struggles with almost 22 months of slumping revenue. Chinese President Xi Jinping’s anti-graft campaign, as well as heightened scrutiny of junket operators, have sent gambling revenue plunging.”
- “Sands China’s first quarter is weaker than expected, primarily due to poor performance in nongaming business and higher bad debt expense,” Sanford C. Bernstein & Co. LLC’s analysts led by Vitaly Umansky said in a note after the results. While the gaming business is stabilizing, its profit margin contracted on lower retail rental income and lower hotel occupancy rate, the analysts wrote.
- "I don’t see that this is going to be permanent. When we open the Parisian I’m completely confident, more than confident," said the 82-year-old Adelson, who is also chairman and chief executive officer of Sands China. "Everything is cyclical – we’ve been in Macau for 12 years now, and there have been times over the 12 years that people thought that the business was going down, and then it’s going to go up."
Financial relationship
According to previous 10-K filings by the Las Vegas Sands, Macao businesses had contributed roughly 60% to Las Vegas Sands’ revenue on an annual basis.
Therefore, a person with a strong stomach, who is anticipting that China, once again, will recover and improve its GDP and political relationships, among others, therefore resulting in a recovery in Sands China’s ADR shares, may want to check Sands China's financial performance rather than Las Vegas Sands.
An investor who would rather pursue some form of diversification from China may want to consider Las Vegas Sands instead, or better yet its peers, such as MGM Resorts International (MGM, Financial), which has lesser (~28%) exposure to China on a five-year average.
Market price performance
A quick recap of market share performance before delving into the financial performance of Sands China appeared necessary. The recent weak performance in Sands China shares was not the first time, in fact, Sands China shares underperformed by a wide margin since early 2014.
Sands China ADR shares underperformed the worst among the three. According to the Dividend Channel (source), a $10,000 investment in the ADR shares from January 2013 to present would have an annual average total return of -2.27%. The same date range would give 13.68% and 2.45% for S&P 500 and Las Vegas Sands.
The cause of recent decline in China business
Las Vegas Sands explained the best reason why its China operation has been on a decline since 2014. According to page 32 of its 10-K, “The number of visitors to Macao, particularly visitors from mainland China, may decline or travel to Macao may be disrupted. Our VIP and mass market gaming customers typically come from nearby destinations in Asia, including mainland China, Hong Kong, South Korea and Japan. Increasingly, a significant number of gaming customers come to our casinos from mainland China. Any slowdown in economic growth or changes to China’s current restrictions on travel and currency movements could further disrupt the number of visitors from mainland China to our casinos in Macao as well as the amounts they are willing and able to spend while at our properties.”
*From here, much discussion will be focused on Sands China, but Las Vegas Sands numbers will still be included in graphs (for comparison reasons).
China GDP vs. sales growth
* Data for China GDP was from Statista.
Interestingly, correlation between China’s GDP and Sands China’s sales growth of data fell into just 0.47, which ranked at a medium strength of association. There may be a connection that, whenever China GDP growth goes higher, Sands China sales will head the same direction. Nevertheless, Sheldon Adelson may have said it better. The casino business is just plain cyclical.
Profit margin
Values for profit margin revealed that Sands China has been consistently more profitable than Las Vegas Sands. Further, the difference between Sands China's and Las Vegas Sands' profitability has been narrowing over the last five years.
Free cash flow growth
Comparing free cash flow values between the two companies can be useless, as Las Vegas Sands would definitely have higher values due to the fact that it collates Sands China’s cash flow in its consolidated financial statements. In contrast, the graph exhibited above demonstrated that free cash flow growth has been erratic due to the cyclical nature of the casino and hotel businesses in either companies. Another observation was that both companies failed to grow their cash flow positively between 2006 and 2009, the period of the Great Recession.
Book value growth
Book value growth also proved to be erratic. Just proves that, if a prospective investor wants to get the most value in either of these companies, the time of purchase of any shares would be conservative and may provide optimal returns only when bought at a substantial discount to either of the companies’ average multiples.
Debt to equity and shares outstanding
Sands China ADR demonstrated discipline in terms of not diluting its previous shareholders as to increasing its outstanding shares over the previous five years. The company’s debt-to-equity numbers also had been quite exceptional, provided that it operates in a cyclical business environment. In contrast, Las Vegas Sands exhibited a high debt-to-equity ratio in recent years as shown in the image below.
Net shareholder return
Sands China has only been consistent with its dividends since 2012. As shown in the image, the company has been paying more than its profits to its shareholders as dividends. In contrast, the company performed a $71 million share buyback in 2009. That was the only time the company performed any share repurchase.
Price action (1-year)
Sands China ADR shares appeared to be stuck somewhere between $25 and $45 a share. This range of prices still appeared to be a lot lower than where it was in the 2013 and 2014 time frame, when the company’s share price was hovering between $70 and $85 per share.
Valuations
Currently, Mr. Market values Sands China ADR shares at a premium when compared to its peers and the S&P 500. While my simple multiple calculation (basically just multiplying Sands China’s earnings per share from 9 to 15 and averaging the product) gave a valuation of $22 per share.
In summary, Sands China appears to be more profitable than Las Vegas Sands despite the parent-subsidiary business relationship. As this was the case, Mr. Market appreciates more of Sands China than its peers. Nevertheless, dividend investors must be aware, too, that Sands China has been actively paying out more than its take-home profits to its shareholders in recent years. Sands China would be a terrific investment only at the right discounted price compared to its peers and only in a less economically challenged China compared to the country’s current state.
Happy investing!
