Las Vegas Sands Looks Undervalued Despite Near-Term Macau Headwinds

Since July 26, shares of Las Vegas Sands (NYSE: LVS) have tanked 20% in the wake of the demonstration at Hong Kong airport and the subsequent increase in violent clashes between the protesters and authorities. The events quickly raised investor concerns about the economic stability of the region (Hong Kong & Macau), as nearly 15% of Macau’s visitors are from Hong Kong. As 70% of Las Vegas Sands’ casino revenues for 2018 were from Macau, the company’s results for the current quarter are definitely going to feel the pinch. However, these near-term issues do not take away from the company’s long term value. We estimate Las Vegas Sands’ valuation to be $70 per share, which is roughly 20% ahead of the current market price.

You can access detailed trends in Macau’s Gaming Market in a Trefis interactive dashboard to compare yearly trends in gross gaming revenues and visitor arrivals with the recent declines to assess the impact of key parameters on Las Vegas Sands’ casino business. Additionally, you can find more of our Consumer Discretionary sector data here.

A Quick Look at Las Vegas Sands’ Revenues

Las Vegas Sands reported $13.7 billion in Total Revenues for full-year 2018. This included five revenue streams:

• Casino: $9.8 billion in FY2018 (72% of Total Revenues). This segment includes income from regulated gambling activities at the company’s properties. Macau and Singapore properties contribute 69% and 22% of the casino revenues, respectively.
• Rooms: $1.7 billion in FY2018 (13% of Total Revenues). This segment includes income from visitors/tourists who lodge in the company’s properties. Macau, Las Vegas, and Singapore properties contribute 42%, 35%, and 23% of the room revenues, respectively.
• Food and Beverage: $865 million in FY2018 (6% of Total Revenues). This segment includes income from restaurants at the company’s properties.
• Mall: $690 million in FY2018 (5% of Total Revenues). This segment includes rental income from retail stores at the company’s properties.
• Convention, Retail and Other: $622 million in FY2018 (5% of Total Revenues). This segment includes income from business conventions at the company’s properties.

Long Term Trends in Favor of Macau

• Since 2015, the number of visitors in Macau has grown at a CAGR of 5.2% to 35.8 million in 2018.
• The number of visitors from Mainland China has been growing at a faster rate than Hong Kong and other destinations.
• The share of visitors from Mainland China has increased from 66% in 2016 to 70% in 2018.
• Before the escalation of protests in July 2019, the number of visitors increased in Macau by 21% and 19% in Q1 and Q2, respectively.
• However, in July the number of visitors increased at a slower rate of 16%. A slower Q3 is expected as the protests in Hong Kong became violent in August and September.
• Given an imminent resolution in Hong Kong and the upcoming Chinese Golden Week, cheer should return to the Macau Gaming Market in Q4.

Las Vegas Sands Has A Low Exposure To VIP Gaming

• In 2018, Las Vegas Sands generated nearly 70% of its casino revenues from Macau.
• Per the company’s filings, it generated nearly $80 billion of rolling chip (VIP gaming) volume and $24 billion of non-rolling chip (mass market) volume in 2018.
• Though LVS does not report its VIP and mass gaming revenues separately, we estimate that it generated less than 15% of its Macau casino revenues from VIP gaming – considering a low win percentage as well as higher discounts to VIP customers.
• We estimate that the long-term growth prospects of mass gaming and LVS’s strong presence in this segment is integral to Sands’ recovery from short-term headwinds.
• To put things in perspective, LVS Macau Mass Market revenues were roughly $4.8 billion. This is approximately 40% of the Macau Mass Baccarat GGR of $12 billion.

As DICJ does not report GRR data by gaming activity on a monthly basis, the sharp declines in August could potentially be attributed to lower VIP gaming as a result of a regulatory crackdown. The impact of Hong Kong protests on tourist visitation in Macau could be further assessed next week as the DSEC releases data for August. However, considering the long-term trends and Sands’ strong presence in mass-market gaming, we maintain our share price estimate for Las Vegas Sands’ stock at $70 per share.

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