Monday, May 26, 2008

Las Vegas Sands Corp Annual Meeting and Report

The LV Sands' (LVS) annual report focuses on its expansion into Asia, more specifically Macau/Macao and the Cotai Strip (a term coined by LVS like the Vegas Strip, to identify the casino district of Macau).

One problem I have with its notice of meeting is that it doesn't tell you exactly where it is--just that it's at the Venetian 3355 Las Vegas Blvd South, Las Vegas, NV 89109. That's all very nice, but where in the Venetian? This sort of vague notice always activates my "welcome" sensors and makes me think that a company doesn't want to deal with individual shareholders, a sign of insularity. Lo and behold, page 25 of the 10K confirms my suspicions: "Mr. [Sheldon G.] Adelson and trusts for [his] benefit...beneficially own approximately 69% of our outstanding stock...we are considered a controlled company under the NYSE listing standards...The interests of Mr. Adelson may conflict with your interests." Really? You don't say.

But the situation in Macau isn't much better. Stanley Ho practically owned all the casino licenses and now "holds one of the three concessions." Guess who owns another concession/license to operate? His daughter: "MGM MIRAGE has entered into a joint venture agreement with Stanley Ho's daughter, Pansy Ho Chiu-king, to develop...two major Macau." (page 8, 2007 annual report). Wynn owns the third concession.

Here are the rest of the 10K's highlights, at least from my perspective:

1. LVS's main geographic areas are in Vegas, Macao, and Singapore. The international expansion is a prodigious move, because Asian consumers are more flush with disposable income and have a non-Puritan culture that doesn't deem gambling sinful.

2. One issue I don't understand is why there are so few tables and slots at Sands Macau. The Sands Macao has 630 table games and 1,350 slot machines (page 2). The Pennsylvania license LVS received allows 3,000 to 5,000 slot machines (page 13), and the Venetian Macau has 1,150 table games and 2,650 slot machines. There is obviously a size difference involved (229,000 sq ft for the Sands Macau vs. 550,000 sq ft for the Venetian Macau), but it is hard to see why visitors will choose the Sands Macau over the Venetian. One reason may be its location near the waterfront, i.e. the casino just wanted a location near the waterfront and was willing to sacrifice amenities and space. Page 44 shows the difference in revenue--the Sands actually made more than twice the revenue of the Venetian Macau, but that's because the Venetian Macau opened in August 2007. Over time, I see a less prosperous future for the Sands Macau unless it can somehow differentiate itself.

3. If anyone is interested, the Vegas Venetian's table games win percentage was 22.3% in 2007, which means that players won slightly more than 1/5 of the time (page 44). Not good odds. For more on this issue, see

For gamblers:

4. At the MGM shareholder meeting, CEO Lanni implied that LVS's real estate development wasn't progressing smoothly. If that is the case, LVS's condos, set to open in late 2009, may impact LVS negatively up to 600 million dollars (page 3).

5. As cities lose manufacturing, they will turn to casinos to make up lost tax revenue. Witness the Sands Bethworks, a casino set to open in Bethlehem, PA in summer 2009. Brace yourself, Sean Thornton--Steeltown is now Gamingtown (page 3).

6. LVS may build a casino/resort in Kansas City, KS (page 5).

7. Macao's currency is called the "pataca," and it is linked to the Hong Kong dollar, which is pegged to the U.S. dollar (page 7).

8. There are apparently popular games called "pachinko" as well as "pachislot parlors" in Japan (page 8). I've never heard of these games, and I've played a round or two of Doppelkopf. Baccarat is the most popular game in Macao (page 7).

9. Nevada generally taxes gross revenues from casinos at a 6.75% rate (page 12).

10. The Nevada Board requires casinos to put 10,000 dollars into a revolving fund for any possible investigation "into their participation in such foreign gaming operation." (page 12) This struck me as hilarious, because the 10K doesn't really define what this investigation would entail, and the amount is too low for an adequate investigation.

11. One major problem with Macao is that Macao taxes gross revenue, but "gross gaming revenue does not include deductions for credit losses" (page 17). This means that if a player gets x million dollars in credit from the casino and fails to pay up, the casino still has to pay taxes on that x million dollars. As a result, casinos aren't going to be as willing to extend credit to their players, which could be a problem in the future, as some major players might feel disrespected.

12. Singapore seems to have the most fair taxation structure. See page 18: it taxes 15% of the gross gaming revenue, but reduces the tax to 5% for VIP players. Singapore protects its own citizens by disallowing LVS from extending credit except to "premium players and non-Singapore residents." I bet there's going to be some interesting discussions about who a premium or VIP player is for the purpose of calculating taxation. Singapore allows bad debts (credit extensions to players that are not paid) to offset corporate income tax. Once again, Singapore seems to be at the forefront internationally in how it deals with business.

13. LVS employs about 28,000 employees worldwide. The Venetian and Palazzo employees are non-union (page 18-19).

14. One the easiest sections in a casino operator's 10K is the IP section. There's practically no risk in having your intellectual property taken away from you except for someone mis-using your name.

15. Here's one interesting note for next quarter's numbers, and perhaps some good news for LVS investors: see page 20--LVS has most likely sold its Shoppes at the Palazzo on or around February 29, 2008 for around 700 million dollars, which will boost gross revenue as GGP pays off LVS. I can't see any specific one-time payments from GGP in the most recent quarterly reports (nothing in "Gain (Loss) on Sale of Assets" line on the Income Statement--maybe recorded under "Non-Cash Items" in the Cash Flow?), but it must be recorded somewhere.

16. For people who are unfamiliar with how real property transactions typically occur in China and places where there isn't much land (Side note: America's single greatest advantage is its vast land. Thank you, France--that was the best 23 million ever spent in the history of the world). Basically, you don't buy the land, you get long term renewable leases. Page 30 indicates that LVS has a long term lease for 25 years, with automatic extensions of 10 years. I don't know how "automatic" that renewal really is. The bottom line is that if LVS ticks off the Macau government, those investments on the land may revert back to the state.

17. Some bad news: LVS has been getting a corporate tax holiday in Macau--this tax break will continue only to the "end of 2008" (page 34).

18. We now come to the straight dope. See page 40: for 2006 and 2007, diluted earnings per share went from 1.24 to 0.33. Ouch.

As I indicated in my earlier post on the MGM shareholder meeting, I am neutral on gaming stocks.

No matter how its gaming stocks are performing, Vegas makes for a fun trip and will continue to benefit from Californians' love of a quick weekend getaway and cheap Southwest Airlines fares. If you get to Vegas and you're a sports fan, go to the sports book at the Wynn. If you love food, check out the buffet at the Rio. Personally, I wouldn't miss the Burger Bar at Mandalay Place. Get the buffalo burger (cook it medium) with an egg over easy as a topping and the sweet potato fries.

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