Las Vegas Sands Set to Ride Macao Recovery
With Macao showing signs of a recovery, it may be time to take a closer look at Las Vegas Sands Corp. (NYSE:LVS), which is a pure play on the Asian gaming markets.
Company profile
Las Vegas Sands is a developer and operator of casino, entertainment and retail mall properties, primarily in Asia. Its integrated resorts feature gaming, entertainment, conference facilities, hotels and expansive shopping and restaurant options. The company caters to mass market and VIP guests.
It owns 69.9% of Sands China, which operates in the Macao region of China. Sands China owns The Venetian Macao, The Londoner Macao, The Parisian Macao and the Four Seasons/Plaza Casino on the Cotai Strip, as well as the Sand Macao off the strip. It also has ferry and other operations in the area.
Outside of China, Las Vegas Sands also owns the Marina Bay Sands resort in Singapore. The resort opened with 2,600 rooms and 160,000 square feet of gaming space, a dining and entertain complex, a theater, convention space and even an art and science museum.
The company previously sold off its properties in Las Vegas.
Opportunities and risks
The biggest opportunity for Las Vegas Sands is a return to pre-pandemic tourism levels in Macao. The Chinese Covid lockdown dampened travel to the gaming hotspot, and the Macao market is still recovering.
Macao did see some nice improvements in the fourth quarter, with visits from China, excluding the bordering Guangdong Province, reaching 2.61. million visits. That was about 86% the level of visits in fourth-quarter 2019 before Covid hit. Total visitations, meanwhile, reached 8.30 million, about 90% of the level of the pre-pandemic traffic, when there were 9.30 millon people who visited the gaming mecca. This is despite airport seat capacity at only 81% of 2019 levels in December at the Macao Airport. Mass gaming revenue in Macao, meanwhile, hit $5.90 billion, which was 5% above 2019 levels.
For Sands China, the mass market returned close to 2019 levels in the fourth quarter. However, high rollers have been slow to come back to its properties. Rolling volume, which measures VIP play, was $6 billion in the quarter, only 40% of 2019 levels. Meanwhile, its roll win percentage of 2.16% was below expectations, hurting its Ebitda by $40 million in the quarter. As a result, its Macao segment Ebitda was $654 million, down from $811 million in the fourth quarter of 2019. That represents a lot of Ebitda it has the potential to get back in the coming years.
Now one way Las Vegas Sands is looking to lure back high rollers and gamers in general is to invest in its properties. The biggest investment is being directed towards its Londoner Macao property. The company has already completed Phase 1 of its investments in the property, including opening its ultra-VIP hotel the Londoner Court. Phase two started in November and is expected to be completed by Chinese New Year 2025. The $1.20 billion project will include the renovation and repositioning of the Sheraton and Conrad hotels, as well as the renovation of the Pacifica casino. New dining, entertainment, retail and wellness attractions will also be added.
Discussing the project on the fourth-quarter earnings call, CEO Robert Goldstein said:
I understand the market is concerned about London disruption. It's a valid point. However, two thoughts for you. One is that I think if the market continues to accelerate like we're seeing through January market numbers, perhaps we can overcome that by using other assets in the portfolio. But secondly, I think when you see the eventual transformation of Londoner, it will be a juggernaut on par with the Venetian or beyond. So, it gives us two assets we think can probably make $3 billion by themselves. And while there's disruption in '24, '25 and beyond gives us something that's unique in that market. The #1 and 2 assets are #1 and 1 assets in that market for years to come. So, there may be some disruption but maybe market force can overcome that, but I think the end result is well worth the pain.
In addition to upgrading the Londoner, Las Vegas Sands is also in the process of renovating and refurbishing its Marina Bay property in Singapore. The $1.75 billion project is being done in two phases and will see the hotel add 770 new suites and feature 1,850 redesigned rooms, as well as enhanced dining, premium gaming, entertainment and retail attractions. The project is expected to be completed by Chinese New Year 2025.
Now with major renovations at two of of its major properties does come the risk of disruption. High-end gamblers want a luxury experience and do not want to deal with renovations. As such, there could be some near-term pressure on these properties during these transformations.
Another risk is Las Vegas Sands ties to China and the Asian markets. Gaming can be impacted by the economy, and China's economy has struggled coming out of the pandemic. Even its Singapore property still gets a lot of its traffic from mainland China.
As a U.S. company operating in China, Las Vegas Sands faces other risks as well. Tensions between the U.S. and China have been elevated in recent years, and there could be both government and consumer backlash. The gaming operator is all in on China at this point, so its risks are particularly elevated if tensions escalate any further.
Las Vegas Sands also carries debt and ended 2023 at about 3 times leverage. Any disruptions to its business could cause this to become an issue. Meanwhile, it is looking to spend a fair amount on capital expenditure while improving its properties.
The company is also looking at an opportunity to potentially expand back into the U.S. The company is bidding for a license in New York and has said it is enthused by its prospects and that its bid is compelling. The company would look to build a $6 billion luxury casino and resort if it wins the license.
Valuation
Las Vegas Sands trades at 9.30 times adjusted Ebitda based on 2024 analyst estimates of $5 billion. Based on the 2025 consensus of $5.40 billion, the stock trades at an 8.60 multiple.
On a price-earnings basis, it trades at 18.40 times the 2024 consensus of $2.70 and 16 times the 2025 consensus of $3.11.
It is projected to grow revenue by 17.50% in 2024 and 6.40% in 2025.
Currently, most casino stocks trade in the 8 to 10 times Ebitda range, with larger operators trading toward the high end of the range and regional operators towards the lower end of that range. And while casino operators like Wynn Resorts (NASDAQ:WYNN) and MGM Resorts (NYSE:MGM) have Macao properties in addition to their Las Vegas properties, Las Vegas Sands is one of the best pure plays on a recovery of the Chinese market.
It also carries less leverage than both Wynn Resorts and MGM, which have leverage of 4.50 times and 3.50 times, respectively, and generates plently of cash (over $2 bilion in operating cash flow) to fund its current renovation cycle. I would expect Macao to outperform Las Vegas given it is in the earlier stages of a recovery, and thus expect more growth potential from Las Vegas Sands as well.
Pre-pandemic, Las Vegas Sands' stock traded between 10 and 14 times enterprise value/Ebitda. That would give the stock a fair value range of between $60 and $89 based on 2025 Ebitda estimates.
Conclusion
Las Vegas Sand is a strong play on a Macao recovery. Visitations are getting back to pre-pandemic levels and, in time, growth should surpass those levels. The Chinese gaming market in the past has shown strong growth, and if China follows the rest of the world after post-Covid lockdown behavior, there will be a lot more emphasis on experiences and travel, which will greatly benefit casino operators in Macao as well as nearby Singapore. December and January have shown strong trends for Macao and could be a good harbinger for the future.
At the same time, Las Vegas Sands is making some large renovations at both the Londoner Macao and its Marina Bay Sands resorts in Singapore. These investments should draw in more VIP guests and make both places top casino and resort draws in the region. While Las Vegas Sands tends to focus on the mass market, it is clearly trying to get more action in this very important part of the Chinese gaming market. In general, though, guests flock to more newly renovated properties with top amenities.
The New York bid is a bit of a wild card. If it can win a license to build a gaming resort in the state, it should be a boost to the stock. This adds some nice optionality.
While the name comes with risks, it could be worth the gamble as I expect it to grow faster than its rivals, while trading at an attractive valuation compared to historical levels.
This article first appeared on GuruFocus.
