Las Vegas Sands:

August 18, 2015 01:00 PM

Ronnie Moas

Standpoint Research Inc. initiated a “Buy” recommendation on Las Vegas Sands (LVS) June 4 when it was trading at $53.39 based on the belief that the bad news and concerns regarding Macau were already priced in with the shares down 40% since Feb. 1, 2014 and off 60% since Oct. 1, 2007. 
In a recent report covering 750 names (most from the Russell-1000), LVS ranked #52 based on a 155-variable computer model.

Las Vegas Sands develops, owns and operates integrated resorts in Asia and the United States. The company owns and operates the Venetian Macao Resort Hotel, Sands Cotai Central, the Four Seasons Hotel Macao, the Plaza Casino and the Sands Macao in Macau, the People’s Republic of China. It also owns and operates the Marina Bay Sands in Singapore; the Venetian Resort Hotel Casino, the Palazzo Resort Hotel Casino and Five-Diamond luxury resorts on the Las Vegas Strip; the Sands Expo and Convention Center in Las Vegas; and the Sands Casino Resort Bethlehem in Bethlehem, Penn.  

LVS’s market capitalization is now $43 billion, the five-year return-on-equity is 24% and earnings purity is 96%. During the last five years, revenues have doubled while earnings-per-share (EPS) tripled. The dividend yield is 4.8%. LVS is leveraged (debt) and its price/cash flow ratio is 12X. Relative strength is in the bottom 10%, which is often a contrarian indicator. The consensus estimate for 2016 EPS is $2.78, down from $3.38 (90 days ago); leaving LVS with a P/E ratio near 20. 

On June 30, casino stocks LVS, Wynn and MGM jumped on news that China eased restrictions on local tourists visiting Macau. Now, with the new law, travelers holding mainland China passports can stay seven days in Macau, up from five days.

This may mark a turning point in sentiment toward a name such as LVS that was recently hit hard by a collapse in gambling in the world’s largest (casino) market. Last year, the government shortened the permitted stay in response to what was believed to be widespread cheating on the part of visa holders who claimed to be visiting another destination while only staying in Macau.

High-frequency gamblers across segments can now visit twice every 30 days versus twice every 60 days. The government was forced to step in and stop the bleeding in Macau just as it has recently intervened to slow the decline in the Chinese stock market. China’s Shanghai Composite Index is now deep in bear market territory – down almost 30% from its June 12 high – following a 120% move in the previous 12 months.

The slump in Macau was hard; gambling revenue dropped by 25% to $36 billion in the 12 months through May 31. June results were worse but came in a bit better than expected. Gambling revenue in the Chinese territory of Macau fell to a five-year low in June, and that marked the 13th consecutive month of declines in the country’s only legal casino hub. Earnings in Macau are five times what is generated in Las Vegas. 

The market was crushed by a government crackdown on corruption that caused wealthy Chinese to cut back on gambling (and other activities). Additionally, there is now a full smoking ban in casinos that is expected to make matters worse. Mainland China accounts for 66% of visitors to Macau, according to the Macau Government Tourist Office. 

The new law gives us insight into the Chinese government’s policy toward Macau. Anti-corruption policies and smoking bans on the island have hit casinos hard. That being said, this latest policy move shows that the government will not let Macau collapse completely and will step in as required. 

The new rules may mark a bottom in revenues, but will not lead to a significant increase. Look for a dead-cat bounce from the low- to mid-$50s to the low- to mid-$60s. If the government decides to add further support and fuel, then high-$60s or low, $70s is possible looking out to 2017-2018.


Zacks Research

Las Vegas Sands Corp. revenues have been missing the Zacks Consensus Estimate for the past few quarters because of sluggish performance in Macau, China. The anti-graft corruption drive undertaken by the Chinese government is keeping VIP gamblers at bay, thereby hurting Macau revenues. Hence, revenues at Macau, which is a key operating region for the company, have been weak during the past year. 

Unfortunately, the situation is not expected to improve in the near term, with more restrictions in the offing. Additionally, heightened competition and a high debt burden pose threats for the company.

Based in Las Vegas, Las Vegas Sands is a leading international developer of multi-use integrated resorts primarily in the United States and Asia. 

The company has three properties in Las Vegas: the Venetian Casino, the Palazzo and an Expo and Convention Center. It also operates the Sands Casino Resort Bethlehem in Bethlehem, Penn.  

In Asia, the company owns and operates several properties in Macau and one in Singapore. 

LVS’s first quarter 2015 revenues missed the Zacks Consensus Estimate by 10.8%, marking the fourth consecutive quarter of revenue miss. Also, it fell 25% year-over-year. The downside reflects sluggish Macau revenues. In fact, revenues at all the businesses in Macau fell on a year-over-year basis in the first quarter. Quarterly net earnings also missed the consensus mark by 10.8% and declined 32% year-over-year. The downside reflects a slowdown in Macau gambling growth as a result of high-stake gamblers curtailing spending amid a cooling Chinese economy. 

Macau has been sluggish since June 2014 with gambling revenues declining double digits since September 2014. Also, the nationwide crackdown on corruption in China has compelled Macau officials to impose strict restrictions on VIP gamblers to stop billions of dollars from being siphoned off illegally from mainland China. 

Restrictions like limitation on the use of state-backed payment processor UnionPay is making it harder for players to obtain cash to gamble. Moreover, tighter restrictions on visas and the smoking ban in casinos are further hurting the results. The significant decline in gross gaming revenues and visitor spending has led to a decline in Macau’s GDP for three consecutive quarters.  The situation is expected to worsen in the near term with China expected to launch another major crackdown to restrict illegal money transfers. The crackdown comes at a time when LVS is already feeling the heat of China’s anti-corruption campaign. 

The Macau government is expected to submit a bill to ban smoking in the VIP rooms after implementing the same for mass gaming floors in Oct 2014. This would compound woes as the smoking ban, if implemented, would further damage revenues. 

Also, increased hotel openings and promotional activities have made the Las Vegas and Macau markets highly competitive. Thus, excess supply, especially in the Macau market, might reduce the company’s market share. The company’s upcoming project at the Cotai Strip will face extreme peer pressure from several Chinese casino operators and other U.S.-based companies. Wynn Resorts (WYNN), another casino operator, also is building a full-scale integrated resort on the Cotai Strip at a cost of around $4 billion. The construction is slated to begin in the first half of 2016. Another U.S.-based casino giant, MGM Resorts International (MGM) also is set to open a new resort in Cotai in late 2016. These openings may pose a huge threat to the company’s business in the future.

LVS’s heavy reliance on debt financing remains another concern. As of March 31, 2015, unrestricted cash balance stood at $2.41 billion. However, total debt outstanding was as high as $9.24 billion. Owing to a higher debt burden, the company may fail to finance its upcoming projects. Moreover, any downturn in the macroeconomic and credit market conditions would make it difficult for the company to pay or refinance its debt going forward. 

While LVS’s solid fundamentals and expansion plans creates some risk for shorts, the current headwinds it is facing make it a sell.

About the Author

Ronnie Moas is the founder and director of research at Standpoint Research. TipRanks recently ranked Ronnie #1 in a ranking of 3,500 analysts evaluating more than 400 of his recommendations since 2008. Ronnie Ideas are generated by a 155-variable computer model after heavy fundamental and subjective overlays are applied. Ronnie is also the founder of Research free trial at @RonnieMoas

Steve Reitmeister is the executive vice president at Zacks Investment Research at The cornerstone of the firm is the Zacks Rank stock rating system and its 26% average annual return since 1988. These results have been examined and attested to by the independent accounting firm Baker Tilley. @ZacksResearch