Las Vegas Sands Price Estimate Revised From $64 to $56 Amid Decelerating Chinese Economy & Currency Woes

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Las Vegas Sands (NYSE:LVS) stock has plunged around 15% so far in August. This can primarily be attributed to uncertainties pertaining to Macau gaming and more recently to concerns that a decelerating Chinese economy may slow global growth. Adding to the woes of the casino operators, the recent decline in the Chinese Yuan has made the bets more expensive in Macau, as bets in Macau casinos are placed in the Hong Kong Dollars and not the Yuan. Furthermore, August gaming data for the first two weeks points towards the second worst fall in Macau gross gaming revenues since 2010. Given the recent developments, we have cut our near term revenue forecast for Las Vegas Sands and revised the price estimate from $64 to $56. Below we explain the changes to our estimates.

Expect Macau Gaming Revenues To Decline In 2015 And 2016

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We believe that the situation in Macau will remain fraught in the near term and will continue to have an unfavorable impact on VIP gaming, not only in 2015 but also in 2016. The decline started last summer with anti-graft measures from Beijing, which kept VIPs away from Macau. Further measures such as a smoking ban and visa restrictions added to the woes of casino operators. As a result, overall Macau gross gaming revenues have plunged year to year more than 35% consistently since February this year. Since Macau’s economy is heavily dependent on casinos, its GDP also dropped 25% in Q1 2015. A few weeks back, there were some positive developments in Macau such as the relaxation of visa restrictions and a likely delay of the smoking ban, which suggested that an uptick in gaming maybe around the corner. However, the recent meltdown in equity markets over concerns of a decelerating Chinese economy once again sparked fears among investors, and the much-awaited recovery in Macau casino market no longer seems imminent. The recent devaluation of Yuan has further added to the woes, as it has made betting expensive for the casino players. This is likely to weigh over the mass-market gaming as well as VIP gaming in the near term. August gaming data for the first two weeks also points towards the second worst fall since 2010 with a likely gross revenue decline of anywhere between 36% and 39% for the full month. [1]

Accordingly, we have revised our revenue forecast in the near term. We now expect Las Vegas Sands’ VIP gaming turnover (rolling chip volume) to decline from a little under $140 billion in 2014 to around $82 billion by 2016. Similarly, we expect mass market gaming drop (non-rolling chip volume) to decline from $21.70 billion in 2014 to $15.45 billion in 2016. Most of this decline will come in 2015 and we estimate only a little decline in 2016 as the Macau market has seen consistent 30%-plus declines since February, and monthly gaming revenues have been stable in the range of $17 billion to $20 billion for most of 2015. If this stability persists in the coming months, the comparison will be favorable starting in 2016. Also, in the coming years, Las Vegas Sands will open its new property, The Parisian, which will enhance its capacity in the region.

We continue to believe that continued growth in Mainland China visitors and income levels and Sands’ enhanced capacity will drive its casino operations in the long run. We estimate the VIP turnover to be north of $125 billion and mass-market gaming turnover to be north of $32 billion by the end of our forecast period. With a consistent 3% hold percentage, VIP revenues will be north of $2.5 billion and over 24% hold percentage for mass-market gaming, segment revenues will be north of $8 billion by the end of our forecast period. An estimated EBITDA margin of 33% for overall Las Vegas Sands’ Macau casino operations will translate into EBITDA of around $840 million for VIP and $2.65 billion for mass-market, together representing around 45% of the company-wide EBITDA.

For 2015, we now forecast Las Vegas Sands’ overall revenues to be around $13 billion with EPS of 2.73 as compared to $2.61, according to Reuters.


Notes:
  1. Macau gambling revenue slide continues, Gaming Data, Aug 20, 2015 []