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Rod Smith

Analyst: Venetian Clear No. 2, Strong Earnings Put Strip Resort Behind Only Bellagio

4 February 2004

Despite strong growth in 2003 at the Las Vegas Sands, owner and operator of The Venetian, Grand Canal Shops and Sands Macau, net income faltered in the fourth quarter on weak table play, depreciation and interest expenses, officials said Tuesday.

Net income increased in 2003 to $38.2 million, up from a loss of $38.4 million in 2002. For the fourth quarter, however, net income dropped to $2.6 million, down 56 percent from $6 million in the fourth quarter of 2002.

"Today's results confirm their standing as Las Vegas' most recent success story. Although their table hold was low, they were able to generate (adjusted) cash flow of almost $260 million, which places them as the definitive No. 2 in this market after The Bellagio," said Deutsche Bank analyst Andrew Zarnett.

Cash flow, a key measure of profits, increased to $227.6 million in 2003, up 20 percent from $190.4 million a year earlier. In the fourth quarter, it increased to $53.3 million, up 6 percent from $49.9 million in the same period a year earlier.

Revenues for the company increased to $686.3 million in 2003, up 13 percent from $605.6 million in 2002; and to $177.5 million in the fourth quarter, up 19 percent from $163.2 million a year before.

Bear Stearns & Co. analyst John Mulkey said nearly all financial indicators at The Venetian were up in 2003 compared with 2002 because of the June 2003 opening of several new amenities and the resort's 1,013-room Venezia tower.

Sands President Bill Weidner in a conference call with Wall Street analysts said softness in the Asian market, caused by the severe acute respiratory syndrome scare which hit in the spring and the timing of the Chinese New Year, was the weak point in last year's financial performance.

Bear Stearns analyst John Mulkey explained that The Venetian hosted fewer high-end players compared to 2002 because the 2003 Chinese New Year fell closer to the Christmas holidays. That meant fewer high-end customers making two trips to Las Vegas.

Still, Zarnett said The Venetian "has one of the strongest growth programs under way with the opportunities for Phase II, Macau and a U.K. strategy."

The company plans to build a new resort, probably with about 3,000 rooms and costing more than $1 billion, on the corner of the Strip and Sands Avenue across from Wynn Las Vegas.

It is also building a $550 million Venetian-style resort complex on Macau off the coast of mainland China and is exploring options for casino development in Great Britain.

Zarnett added that with a number of new hotel towers in Las Vegas, including the new tower at Mandalay Bay Resort, and new towers under way at Caesars Palace and The Bellagio, the success The Venetian has had with its new, 1,000-room Venezia tower bodes well for the Las Vegas market.

However, Mulkey warned in an advisory to investors that the Sands needs to address "covenant restrictions" before proceeding with such a development.

Specifically, restrictions were built into the bonds that financed the new Venezia tower promising investors their funds would only be used if certain hurdles were passed.

Wall Street sources, however, said while the targets have not been met, they could be quickly if the Sands places an initial public offering. They predicted an IPO would take place shortly after the opening of the Sands Macau, probably in March or early April.

They said the opening of the Macau operation is essential for the IPO because, with it, the Sands will establish the cash flow necessary for the size IPO it will need to offer.