Las Vegas Sands Price Estimate Revised To $69 Amid Continued Decline In Macau Gaming

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Las Vegas Sands

We have revised our price target for Las Vegas Sands (NYSE:LVS) stock from $74 to $69, which reflects a change of more than 5%. The current valuation reflects our revised estimates of Las Vegas Sands’ casino operations in Macau. We believe that the company’s VIP gaming turnover in Macau will continue to see some pressure in the coming months amid the ongoing anti-corruption crackdown in the region. However, we believe the growth in this segment will resume next year and partly will be driven by its new casino resort, The Parisian, in Cotai, which will further enhance its market share in the region. We continue to remain bullish on Macau gaming in the long run and expect the VIP gaming turnover to be around $165 billion by the end of our forecast period. The company makes most of its profits in Macau from mass-market gaming, which has been growing rapidly in the region. However, given the recent slowdown, we have revised the non-rolling chip drop from close to $50 billion to $44 billion by the end of our forecast period. We have also restructured Las Vegas Sands’ model to give a better picture of gaming revenues in Macau. We now report gaming revenues, net of commissions.

We estimate gross revenues of about $15.5 billion for Las Vegas Sands in 2015, with EPS of $3.52, which is slightly higher than the market consensus of $3.13, compiled by Thomson Reuters. We currently have a $69 price estimate for Las Vegas Sands, which is around 25% ahead of the current market price of $55.

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Expect VIP Gaming To Decline In 2015

We believe that the situation in Macau will remain fraught in the near term and it will continue to have an unfavorable impact on VIP gaming in the coming months. As we know, 2014 was tough for all the casino operators in Macau and it marked as the first full year of gross gaming revenue decline. The primary reason for this drop is the government’s anti corruption crackdown. A wave of high-profile arrests of senior Chinese officials has hurt the VIP business of Macau casinos. Visa transit restrictions, a smoking ban and the weakening economy added to the woes for casino operators in the region. Moreover, Beijing wants Macau to diversify its economy, largely dependent on gambling, which accounted for 80% of the local government revenues in 2013. However, it must be noted that Las Vegas Sands’ exposure to VIP gaming is limited in Macau, as the company has been focused on expanding the mass-market gaming operations for quite some time now. Macau VIP gaming accounts for only 12% while mass-market gaming accounts for more than 30% of Las Vegas Sands’ stock value, according to our estimates.

Given the recent trends, Macau rolling chip volume declined 20% in 2014 and we expect it to further drop by 15% to $119 billion in 2015. Looking at mass-market gaming, we expect the volume to grow 5% in 2015 to $22.75 billion. However, we expect the casinos volume to pickup from 2016, when the company’s new Cotai resort will be operational. While the gaming situation in Macau may be fragile in the near term, we expect casinos to do well in the long run, given that Macau is the only place in China where gambling is legal. Also, gambling in China is an accepted practice in the home as well as in social circles. China is seeing growth in the number of HNIs (high net worth individuals), but only a small portion of them visit  Macau for gambling. China currently has about 1.3 million HNIs with a combined wealth of $4.3 trillion. As China continues to grow, more people will likely visit Macau for gaming activities and Las Vegas Sands as well as other casino operators should thus continue to benefit from the rising demand, as they did in the past.

Change In Gaming Revenue Reporting Style

Looking at the reporting style, we now show gaming revenues, net of commissions. Junket commission refers to an arrangement whereby a client is introduced to a casino operator by a junket promoter, who in return receives a commission or payment in other form from the casino operator. Junket commission is paid out either at a fixed rate or win rate model. The fixed rate is 1.25 percent of VIP rolling chip turnover and the casinos remain responsible for gaming taxes while the win rate model is when VIP junket operators split the gross gaming win with the casino and also share the downside risk. It must be noted that there is a small portion of VIP gaming, which does not come through junket promoters. The effective commission rate for Las Vegas Sands has been in the range of 1.00% to 1.25% of the turnover in the past few years and we expect it to remain in that range during the forecast period.