What Factors Can Drive Las Vegas Sands’ Stock Price?

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Las Vegas Sands‘ (NYSE:LVS) Macau casino operations have been struggling amid the anti-graft measures that have led to a massive decline in gaming volumes in the recent past. 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, which is largely dependent on gambling  — an industry that contributes as much as 80% of the local government revenues. As a result, gaming revenues have been declining for 11 straight months in the world’s largest gaming hub. We expect this trend to continue in the near term. However, there still remains uncertainty around the casino operations. An uptick has been anticipated for months and yet we wonder when the casinos will see gaming growth return in Macau. This suggests that there is room for stock price movement depending on the amplitude and the timing of any recovery in gaming volume. While the timing is uncertain the amplitude could well be steep.  We believe that, ultimately, growth in both Mainland China visitors and China’s personal disposable income will spur a recovery in VIP as well as mass-market gaming in Macau, which in turn will catalyze LVS’s stock price movement. Similarly, growth in Singapore gaming volumes can lead to a potential upside of over 10% to the company’s stock price.

Mainland China Visitors Grow By 10% And China Personal Disposable Income Grows By 8% (+15% Upside To Stock Price)

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The growth in Mainland China visitors to Macau and China’s personal disposable income are both linked with the gross gaming revenue growth in Macau. Around 70% of Macau visitors come from Mainland China and therefore a better macroeconomic environment in China is a boon for the Macau gaming industry. Such would seem to be the case.  However, to know for certain, we ran a regression analysis on the data from 2003 to 2014 with Macau gross gaming revenue growth as the dependent variable and Mainland China visitor growth and China personal disposable income growth as independent variables. We arrived at r-square of 0.52 for these variables, which, being on the lower side, may indicate a relatively high level of correlation. However, we note  that one regressor here could be of substantive interest, which on its own could cause the r-square to be low. However, we computed an alternative test in our regression, the F-significance, which defines the significance of independent variables to the response variable. In this case, the f-significance is 0.05, which indicates a strong relationship between these variables. Hence, we know that, historically, both Mainland China visitor growth and China personal disposable income growth are both highly correlated with Macau gaming growth.

Based on above analysis, we estimate that LVS could garner over $15 billion in gross gaming revenues, if China’s personal disposable income grows at an average annual rate of 8% and Mainland China visitors to Macau grow at an average annual rate of 10% in the coming years. This will translate into Macau gross gaming revenues of $80 billion by 2020 and LVS’ market share of around 21% will translate into gross gaming revenues of $15 billion. The charts below shows the historical trends and projections for Mainland China visitors and Macau gross gaming revenues.

We still take a conservative view in our pricing model, owing to the expected increase in competition, given the opening of other casinos in the region and uncertainties pertaining to anti-graft measures. Accordingly, we assume a little under 7% growth in China’s personal disposable income as well as Mainland China visitors.

Having said that, Macau could see massive demand for gaming in the coming years. Gambling in China is a  widely accepted practice in the home as well as in social circles and Macau is the only place in China where gambling is legal and people travel from far states to the island purely for gambling. China is seeing growth in the number of high net worth individuals (HNIs), but only a small portion of them currently visits Macau for gambling. China currently has about 1.3 million HNIs with a combined wealth of $4.3 trillion. As the region 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.

Accordingly, massive demand for gaming could add incremental revenues of close to $3 billion over the next few years, adding 15% to our price estimate and more than 15% to our EPS for 2020. The charts below shows the revenue composition in our base and alternative case scenarios.

 

 

 

 

 

 

 

Singapore Gaming Volume Grows 8% (+10% Upside To Stock Price)

LVS’ Marina Bay Sands and Genting’s Resorts World Sentosa are the only two casinos in Singapore. The company has been operating in Singapore since 2010 and it is the third largest market after Macau and Las Vegas. Many of the players from China and other nearby South Asian countries travel to Singapore for gaming. However, it is difficult to establish a statistical relationship between international visitors and gaming revenues due to low numbers of observations (2010 to 2014). In the past five years, LVS’ Singapore mass gaming volume has increased from $2.40 billion to $4.50 billion and VIP gaming volume has increased from $22 billion to $43 billion. [1] The nearby South Asian economies are growing at a good pace and Singapore is attracting more visitors, which is aiding the casino business of LVS. International visitors have increased from 11.6 million in 2010 to over 15.0 million in 2014. [2] Singapore’s economy grew at 3% in 2014 and is expected to grow at a rate of more than 3% in 2015 as well as 2016. If Singapore’s economy continues to do well, it will be positive for casino companies.

While there appears to be a massive growth opportunity for LVS’ gaming operations in Singapore, we take a conservative view in our pricing model, owing to the continued growth in visitors to Macau from other Asian countries. Accordingly, we currently assume less than $50 billion in VIP gaming volume and around $5.50 billion mass gaming volume by 2021. Nevertheless, Singapore offers massive growth opportunity and given that there are only two casinos in the region, LVS stands to benefit from any growth. If the VIP gaming volume increases to $70 billion and mass gaming volume increases to $7.5 billion, it would translate into incremental revenues of around $1.50 billion. This would add around 10% to the company’s stock value. This impact will come not only from improved VIP and mass gaming, but also from higher slot and hotel revenues.


Notes:
  1. Las Vegas Sands’ SEC Filings []
  2. International Visitor Arrivals, Singapore Tourism Board []