LVS faces an internal review soon on its currently suspended Cotai building projects
Las Vegas Sands Corp (LVS) is to consider shortly whether to terminate existing contracts with construction firms working on plots five and six on the Cotai Strip™ in Macau.
The news emerged during a conference call with analysts to discuss LVS’ fourth quarter results for 2008.
Plots five and six were suspended by LVS in November 2008 in response to project funding challenges linked to the international credit crisis.
The possibility of terminating existing contracts does not mean LVS has given up on developing the two Cotai land parcels. It relates rather to a technical issue. This is whether it will be more cost effective for LVS to seek extensions on existing contracts and so avoid any termination payments, or whether it would be better to relinquish existing deals, pay any relevant contractual penalties, and renegotiate new contracts, potentially at a lower price at a later date.
Any contract termination at this stage, though, is likely to indicate a project suspension of at least a year and possibly more. A research report published before Christmas by investment bank Goldman Sachs indicated that LVS policy on plots five and six was likely to have a significant impact on the general gaming market in Macau and the economy as a whole. Resumption of LVS construction in 2010 could put extra pressure on Melco Crown Entertainment and Galaxy’s Cotai projects, suggested the report authors. The assumption behind that statement appeared to be that LVS would execute the delayed project rapidly and move quickly to open a Sheraton Hotel and a Shangri-La property with accompanying gaming capacity on the plots.
Opening
MPEL is expected to open its City of Dreams integrated resort next door to LVS’s Cotai developments in the second half of this year. Francis Lui, Vice Chairman of Galaxy Entertainment Group, told Inside Asian Gaming that his company is likely to wait until the end of 2009 before announcing an opening date for its Cotai resort. He stressed, however, that this did not mean the opening date had in any way slipped back beyond 2010. He pointed out that external works were proceeding but that internal fit out was being delayed. The expectation was that market conditions would enable the company to re-negotiate contracts on internal fittings at more favourable terms, said Mr Lui.
LVS for its part had previously told analysts that the cost of suspension of its plots five and six was likely to be US$880 million spread over a trading period from Q4 2008 to Q2 2010.
But Kenneth Kay, Senior Vice President and Chief Financial Officer for LVS, told the LVS Q4 ’08 earnings call that the $880 million figure was a “worst case scenario”.
“The way our contracts work over here, we had six months to go through a suspension, to see if financial markets change, etc,” explained Mr Kay.
“Obviously, we’re about three months into that suspension and there’s a likelihood that they’ll [LVS in Asia] either go with termination or negotiate additional suspension periods with their contractors, but the $880 million was a worst case scenario.
“We’re moving towards at least hitting that point where we have to determine the termination or additional suspension. The $880 million that we talked about was worst case. We think we’re going to do reasonably better than that. The amount spent to date is probably, I’m going to guess, in the range of $350 million.”
Way forward
William Weidner, the company’s President and Chief Operating Officer, acknowledged the challenging trading conditions LVS is facing, but laid out the company’s strategy for developing its business in Asia.
“Our plan has three basic components, where our objectives are to first maximise cash flow from our current operating properties in Las Vegas and Macau,” said Mr Weidner.
“Second, [it’s] to deliver our two ongoing developments, Marina Bay Sands in Singapore, and Sands Bethlehem in Bethlehem, Pennsylvania, on time and on budget. And third, [it’s] to generate liquidity in the sale of non-core assets,” continued Mr Weidner.
“We have made progress on each of these components of our plan since its adoption. We are focused on executing it in spite of the challenging economic conditions in which we all operate.”
Operational savings
Mr Weidner said US$250 million in cost savings had been identified so far across the global operation—half of it, some $125 million, from the Macau operation.
On the issue of the sale of non-core assets, Mr Weidner stressed to analysts that 75% of all cash raised by monetisation of the company’s assets in Macau will be ploughed back into the Macau operation.
“If we sell assets in Macau, depending upon the category of assets, 75% of those [monies] go to pay down Macau debt,” he explained.
The remaining 25% would go to strengthen LVS’s general balance sheet. This would ultimately benefit the Macau operation by improving LVS’s gearing globally, he stressed.
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Mr Weidner’s assurances follow local media reports that a group calling itself ‘The Concerned Residents Group’ has been petitioning Macau Chief Executive Edmund Ho to review the government’s agreements with LVS. This was because of what the group said was a discriminatory decision to suspend work on Cotai while pressing ahead with completion of the Marina Bay Sands resort in Singapore. Mr Weidner strongly denied the claims at the time and continues to do so.
“All our earnings in Macau have stayed in Macau and were matched five times over by additional investments in Macau,” Mr Weidner said at the time.
Careful handling
Nonetheless, the fact that the Macau operation accounted for 82.1% of LVS’s global gaming revenues in Q4 ’08 (compared to 85.7% in Q4 ’07) does make the suspension of work on Cotai a sensitive issue. This is particularly the case since Mr Weidner went on record recently at an investors’ conference in the United States pointing out that Singapore’s lower gaming tax rate (15% on mass market games and 5% on premium play) meant the company’s net earnings per dollar would be higher in Singapore. In Macau, there is an across the board rate of 35% on the gaming gross plus social and welfare payments, bringing the tax burden close to 40%. There is little likelihood that this will be reviewed before Edmund Ho’s term of office ends in December 2009, and a new, as yet unnamed Chief Executive is appointed.
On the specifics of the sale of non-core assets in Macau, Stephen Weaver, President, Asia, for LVS, said the company had been talking to “interested parties” from Korea and Japan about the possible sale of real estate in the Four Seasons complex.
“We know that success of these efforts [monetisation] is an important driver of liquidity and will enable us to execute on our de-leveraging strategy,” explained Mr Weaver.
“To that end, we will shortly be marketing shares in a cooperative structure that will provide the holders of the shares the exclusive use of a unit in The Four Seasons apartment hotel in Macau,” he added.
“While it is clear that residential property prices in the region have been negatively impacted by the weakness in the global economy, our discussions with interested parties, particularly investors we have targeted from Japan and Korea, have continued. What we have on offer is clearly unique—a one of a kind opportunity to own shares in an entity that will provide the holder of the shares the exclusive right to the use of a Four Seasons apartment hotel unit on the Cotai Strip. We are now beginning the process of converting expressions of interest to definitive share purchase agreements, which will require 10% of the price of the shares of the non-refundable deposit,” said Mr Weaver.
Popular mood
Notwithstanding the good news story on the potential for monetisation as told by Mr Weaver, it’s currently pretty fashionable to talk down the market prospects of Macau in general and Las Vegas Sands Corp in particular.
It was no surprise then that newspaper coverage of LVS’ Q4 ’08 results tended to focus on the US$17.8 million adjusted net loss for the fourth quarter sustained despite whopping revenue of US$1.09 billion—¬a 4.3% growth in gross income on the equivalent period in 2007. In Q4 ’07, the company managed an adjusted net surplus of US$71.1 million. LVS explained the Q4 ’08 loss as reflecting increases in net interest expense, and depreciation and amortisation costs.
Arguably of more interest to investors is what’s happening to margins, given LVS’s focus on running an ever more efficient business.
Margins
For the Las Vegas operations, margin on EBITDA (earnings before interest, taxation, depreciation and amortisation) was down 13.4% in Q4 ’08 year-on-year. The Venetian Macao experienced a 9.4% fall in casino revenue in Q4 ’08, but EBITDA margin based on US GAAP (Generally Accepted Accounting Principles) was stable, showing a 0.3% rise year-on-year, thanks in part to compensating factors including a 30.4% increase in ‘retail & other’ revenue. The Venetian Macao generated adjusted EBITDA of US$112.8 million for the fourth quarter of ’08. There were a record 6.7 million visitors during the quarter, said the company.
Brad Stone, President of Global Operations and Construction told the earnings conference call that VIP play made up only 15% of adjusted property EBITDAR for the Venetian Macao in the fourth quarter.
“Given that backdrop, our principal objectives are carefully managing the business and controlling that credit risk while developing more profitable direct play, particularly from markets outside mainland China including Japan, Korea, Indonesia, Taiwan, and Singapore,” said Mr Stone.
“During the fourth quarter, our directed VIP play at the Venetian Macao grew to 16.7% of our total rolling volume compared to just 6.9% in the fourth quarter of 2007 and 14.9% in the third quarter of 2008. We have achieved this increase in direct play while maintaining our prudent approach of bringing credit to our VIP customer market,” he added.
Down
For Sands Macao, all the revenue indicators were down in Q4 ’08 except for hotel income, contributing to an overall 5.5% fall in EBITDA margin.
“Although the results of the Sands Macao clearly reflect the competitive environment for gaming customers on the Macao peninsula, our gaming volumes have remained healthy and reflect the unique market positioning of the Sands Macao on the Macao peninsula,” the company said in a prepared statement on the Q4 ’08 results.
“Our rolling chip table games play was stronger compared to the same quarter last year, and while our mass volumes were down year over year, they continue to reflect healthy play. Looking ahead, we expect to improve our performance at the property by further reducing the Sands’ cost structure,” the company added.
“There is no doubt that we know exactly what it is we have to do and we’re focused on doing that,” said Mr Weidner in his closing remarks to analysts during the Q4 earnings call.
“We’re not that naïve about the environment that we’re in. We recognise what it means to us and what it means to the company and what it is that we have to do. And all of us are focused on that, whether it be in Macau or here in Las Vegas.”
