Macau and Cash Flow Make These Companies Winners


Since the beginning of August, shares of Las Vegas Sands , Wynn Resorts and MGMResorts International have experienced tremendous growth of at least 25%, which compares to a less than 5% increase in the S&P 500. The potential for expansion into the Japanese market and the continued recovery of the Las Vegas market have contributed in part to these stock price gains. The consistent better-than-expected performance of Macau and continued strong balance sheets have been the largest driver of these stock price gains.

Source: Yahoo! Finance

Macau market to date
Many investors entered 2013 with cautious outlooks regarding anything China-related given signs of a slowing economy and the effects of a political transition. Despite these concerns, the market has ended up better than many had expected. Macau gaming revenue growth has been supported by solid economic growth in Mainland China, and strong visitation growth to the region.

Infrastructure expansion has helped drive growth. This includes high speed railways connecting Macau to large cities in Southern China and the recently completed expansion of the Gongbei Border Gate. The expansion of the Pac-On Ferry Terminal could support further incremental growth if it is completed as scheduled in early 2014.

Investors should remain excited about the Macau market
Analysts at Barclays are calling for a 12% growth in gross gaming revenue in 2014 and 15% growth in 2015 as the Macau market will continue to go through its growth phase. Las Vegas Sands, Wynn Resorts and MGM Resorts are all planning on opening new facilities between 2015 and 2016.

Las Vegas Sands will be opening its Parisian resort in the fourth quarter of 2015. It will have 400 gaming tables and 3,300 hotel rooms at a cost of $2.7 billion.

MGM Cotai is scheduled to open in late 2015 (with several sources saying 2016) with 500 tables and 1,600 hotel rooms at a cost of around $2.5 billion.

Wynn Palace is expected to open in the first half of 2016 with 500 gaming tables and 2,00 hotel rooms at a cost of $4 billion.

If required to rank these companies in order of attractiveness, Las Vegas Sands would be the number one choice because it has a dominant position with its already-operational Sands Macau. MGM Resorts would be ranked in second place and Wynn Resorts in third. The reason for these rankings is that technically Macau is under a table cap, which limits the number of gaming tables in the market to 5,500 through the end of 2013 with 3% growth annually after that.

This places Wynn Resorts at a disadvantage. The Las Vegas Sands and MGM Cotai projects are less sensitive to the table limits because they have earlier opening dates. According to a Citigroup report, Wynn's resort is moving at a slower pace compared to MGM properties and feels that a "more realistic" opening date would be in the middle of 2017. The growth of the Macau market is happening now and it will continue way past 2017, but there is little reason why investors should sit on Wynn Resorts shares today and wait until 2017.

All about the money
Over the past twelve months, Las Vegas Sands has repurchased shares valued at $46.6 million, authorized a $1.50 per share annual dividend (which was raised to $2 for 2014) and paid a $2.75 special dividend spurred by a potential change in dividend tax laws in 2013.

Las Vegas Sands is ramping up spending on the Parisian resort. It would likely want to preserve cash until new debt financing can be secured, or hold on to this cash for any potential project in Spain or elsewhere.

On Feb. 28, MGM China announced that it would make semi-annual distributions not to exceed 35% of its expected annual profits to MGM Resorts. From time to time, MGM China could also consider special dividends. However, given MGM China's pricey plans for Cotai, a potential pursuit of a development property in Japan, a special dividend payment might be ruled out as unlikely for the time being.

In contrast with Las Vegas Sands and MGM Resorts, Wynn Resorts has typically paid special dividends at the end of every year. There is little reason to believe that this will not continue. Wynn Macau recently paid out $600 million in dividends to Wynn Resorts, and it also sold $600 million in bonds. Wynn Resorts should have ample cash to continue its special dividend, which is a treat that shareholders have enjoyed over the past seven years. In addition, Wynn Resorts doubled its regular annual dividend to $4 a share from $2 in 2013.

Investors that place emphasis on dividends and special payments might find Wynn Resorts to be the best investment choice at this time. Management has stated during its conference call that its project in Cotai is fully financed and accounted for, which implies that a special dividend is very likely. In fact, Matthew O. Maddox, Chief Financial Officer, Principal Accounting Officer and Treasurer of Wynn, had this to say:

Carlo, as you know, on capital allocation, we have -- we put in $1 a share dividend per quarter to provide investors with stability as we go through this growth phase. As we -- as new projects come onboard, we plan on always keeping that $1. If there's excess cash flow available at the end of the year, then the board will decide what they want to do with it. Wynn -- just so you know, on Cotai, we just are about to sign an additional $200 million accordion on our bank facility at LIBOR plus 175. So Cotai's pretty much fully financed, and future projects are really just speculative right now. And we -- again, we have that $3.5 [ph] billion

Investors should be thankful to have such a complex problem in deciding which casino operator to invest in. Luckily, all three companies are heading in the right direction by focusing on Macau, which some consider "the greatest growth story on the planet." Strong quarterly and special dividends coupled with share buybacks will continue to satisfy investors' needs for years to come.

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