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We visited Las Vegas and met with CZR, GAN, LVS, MGM, Resorts World and WYNN. We left feeling more bullish on the mkt both near- and long-term as Delta and new competition do not seem to be having a meaningful impact, and companies have plans that should continue to drive earnings growth.
1) Vegas continues to produce strong results as demand for leisure remains robust despite Delta concerns. Operators reiterated LV performance has remained strong through August. July was the best month on record in LV (Strip revs/volumes up 46%/33% vs. 2019 levels) driven by a heavy events calendar (July 4, concerts, fights). It is unlikely to be replicated, but operators were unanimous that August continued to be very strong. Despite concerns around near-term headwinds from the Delta variant with re-implemented mask mandates, operators have found that a) any cancellations (mostly group) have been quickly replaced with new bookings, and b) the impact to cash flow is much more pronounced when capacity/social distancing restrictions go in place, which has not happened. While typically replacing group customers with FIT (leisure) travelers would be a headwind to profits, given the increased savings of most customers and pent-up demand, the customers replacing the cancellations have been high quality.
2) Longer-term, LV operators see several paths to generating higher EBITDA. The strength in Vegas YTD has been without multiple pre-Covid revenue streams, which should drive absolute EBITDA higher as they come back. Several companies noted group/convention business picking up in 2H21 into 2022. Mgmt teams also expect int’l customers, which accounted for ~14% of pre-Covid visitation levels but a higher level of earnings, to be a meaningful driver as global travel restrictions ease. There are a number of idiosyncratic opportunities for the various operators too. For example, not all companies have historically been good at cross-selling between properties, both in Vegas and regionally. They also haven’t been good at rewarding/retaining strong non-gaming customers, and been over-reliant on OTAs. In addition, as regional online sports betting and iGaming expands, operators are able to bring new customers into the eco-system and expand their existing relationships, hopefully driving more trips/share of wallet. While current margins are viewed as a stretch, there is the belief that a lot of the increase vs. pre-Covid can be sustained.
3) Resorts World a beautiful property but is having limited impact on competitors so far. We toured the new Resorts World property and felt it was a very nice new property, with fewer Asian influences than was originally planned, more of a mix between the youthfulness of Cosmo and the luxury of Wynn. The cost to develop was $4B for 3,500 rooms so everything is very high quality, with attractive rooms (tied in with Hilton), retail and F&B. The property is positioned to compete with other high-end properties in the market, but notably competitors suggested it has resulted in minimal impact to them so far. Resorts World only adds 2% room supply to the market (similar to US avg annual hotel supply growth), is the first major new resort to open in Vegas since 2010, and despite still building its customer base, the property appears disciplined on room rates. The one place where it is driving up higher costs is with entertainment talent.
4) Significant OSB/iGaming marketing spend during NFL season may obscure LT share winners, but will be most interesting to watch new states. CZR and WYNN’s online products have been improved significantly and both companies have started to deploy substantially more marketing capital to increase mkt share, while others continue to spend heavily. It will be most interesting to watch the trends in competitive new states (AZ, LA, MD) especially where operators have existing footprints to see where trends can go. All that said, market share results are often flattered by free promotional money, so it may be more telling to see share after the NFL season push. We have updated our recent app download analysis to extend out to 8/28/21 and include some state apps that we missed. We found WYNN has seen an increase of app downloads from 1-2% in Nov-April to ~3-6% the past 4 months, while CZR has seen downloads go from 7% in June/July to 21% in Aug.
We continued to hear from online sports book operators their optimism around social. FB (covered by Brian Nowak) announced on Wednesday it has launched free-to-play Facebook Fantasy Games which allows one to predict and collect points on certain sports and TV events, similar to NBC Predictor but potentially without cash prizes. Operators we met with mentioned adding social features (i.e. posting bet slips to social media, ability to chat with, follow, join groups with successful bettors) as a focus. A healthy debate remains around whether the large Internet companies will get more involved in the space. On the one hand, the view is that the regulated/limited TAM/vice nature of the industry will stop them (e.g. TikTok bans gambling-related promos). However, the other view is that Internet companies are fighting for customer screen time and betting/iGaming will be a substantial portion of future screen time. DIS (covered by Ben Swinburne) reported u-turn to potentially allow a sportsbook to use its ESPN brand makes companies feel like it’s more likely these companies will come in.
5) Quality of technology will be key as OSB/iGaming matures over the next few years. We continue to believe that having the highest quality technology infrastructure will be very important as the OSB/iGaming industry matures past the current massive customer acquisition stage. GAN makes a compelling case that there are certain instances where outsourcing things like player account management is better than trying to build everything in-house. The creation and integration of certain products is costly and difficult to do on one’s own, often leading to lower quality product despite being in-sourced. This will be especially pronounced for sub-scale operators.
6) Macau recovery remains opaque, but recent trends give optimism that a revival is on its way. Late July/early August activity was hampered by increased Covid concerns but visitation has started to pick back up over the past few weeks with loosening of gov't lockdowns and vaccination rates gradually increasing. If current trends persist, the hope is that October Golden Week will be similar or better than May Golden Week, continuing the trend of holidays getting gradually better. Operators are still most optimistic around the premium mass recovery.
MORGAN STANLEY & CO. LLC
Thomas Allen
EQUITY ANALYST
Nicholas P DeValeria
RESEARCH ASSOCIATE
Alexandra Ratzker
RESEARCH ASSOCIATE
MORGAN STANLEY ASIA LIMITED
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.
