The uncertain regulatory environment in Macau, the prolonged weakness of the travel industry and Las Vegas Sands (NYSE: LVS) the decision to divest its activities in the United States resulted in a 50% drop in its share. Instead, the actions of MGM Resorts (NYSE: MGM) are trading 40% above pre-Covid levels, mainly thanks to its foray into the sports betting and iGaming industry. The casino industry as a whole turned bearish after Macau’s gaming regulator indicated increased regulatory oversight in its five-year development plan outside MGM Resorts
1. Income growth
MGM Resorts’ growth was somewhat stronger than that of Las Vegas Sands before the pandemic, with MGM Resorts revenue growing at an average rate of 11% per year, from $ 9.5 billion in 2016 to $ 12.9 billion in 2019. Las Vegas Sands revenues has grown at an average rate of 7% per year, from $ 11.2 billion in 2016 to $ 13.7 billion in 2019. Due to mandatory closures and subsequent restrictions, MGM Resorts and Las Vegas Sands have reported a 60% and 74% drop in sales in 2020, respectively.
- In 2019, Sands’ properties in Macau, Vegas and Singapore contributed 63%, 15% and 22% of total revenue, respectively. Prior to the pandemic, the company’s business in Macau was growing strongly, supported by new property openings, mass gambling betting and an increase in tourists. With the pandemic impacting finances, Sands has completely focused on its Asian business, as it contributes nearly three-quarters of revenue and profits, by announcing the sale of its Vegas property.
- MGM Resorts’ Macao, Vegas, Regional (US) and Other businesses represent 22%, 45%, 28% and 5% of total revenues, respectively. The company has a strong presence in the United States and has also gained ground in sports betting and iGaming.
- Notably, MGM’s diverse presence has been a boon to the title in recent months as increased regulatory oversight and proposed changes to Macau’s gaming law are expected to weigh on Macau casinos.
- Interestingly, MGM’s plan to expand its presence in Asia with an integrated hotel complex in Japan will further diversify its business portfolio.
- Instead, Sands’ high concentration in Macau adds a lot of uncertainty to investors given the proposed changes to Macau’s gambling law.
2. Returns (Profits)
Before the pandemic, the operating margin of MGM Resorts and Las Vegas Sands had remained between 20 and 30%. However, both companies incur significant interest charges, reducing the net margin by almost 10 percentage points. Historically, Sands had a slight advantage over MGM, mainly thanks to its leadership in the mass gaming segment in Macau.
- In 2019, Sands reported $ 13.7 billion in net revenue and $ 3 billion in operating cash flow, resulting in an operating cash flow margin of 22%. The company returned $ 3 billion in dividends to shareholders.
- In 2019, MGM Resorts reported $ 12.9 billion in net revenue and $ 1.8 billion in operating cash flow, resulting in an operating cash flow margin of 14%. The company returned $ 270 million in dividends and bought $ 1 billion of common stock.
- Considering the operating cash flow margin and returns to shareholders, Sands has an advantage over MGM Resorts.
In 2019, Sands reported $ 12.5 billion in long-term debt, $ 6.5 billion in equity, and $ 23 billion in total assets. MGM Resorts reported $ 15 billion in long-term debt and operating lease liabilities, $ 12.5 billion in equity and $ 33 billion in total assets. Considering the total asset turnover ratio (revenue / total assets), Sands is significantly better than MGM Resorts, as the two companies generated almost similar revenue of $ 13 billion in 2019.
- Despite a prolonged slump due to the coronavirus crisis, Sands and MGM Resorts did not incur significant impairment charges. Additionally, cost containment measures limited both companies’ operating cash consumption to approximately $ 1.5 billion in 2020.
- Thus, the pandemic did not weaken the balance sheet of either of the two companies.
- Given the significant long-term debt obligations on both companies’ balance sheets, cash-generating capabilities in the post-pandemic period will impact shareholder returns.
- As a result, the uncertain regulatory environment in Macau is currently weighing on the Sands stock. (Related: Should we bet on Las Vegas Sands action after the historic announcement?)
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