Why We Reduced Our Price Estimate For Las Vegas Sands’ Stock By 10%

After the Macau government’s directive on the coronavirus epidemic, Las Vegas Sands (NYSE: LVS) and other casinos in the region temporarily closed their properties in Macau for two weeks. While the epidemic’s impact is imminent on the Chinese economy, Trefis expects Sands to observe sharp declines in revenues and earnings for the full year. We highlight the trends in Las Vegas Sands’ expenses over the years along with our forecast for 2020 in an interactive dashboard and detail the key expense categories that would weigh on Las Vegas Sands’ valuation. Expected revenue headwinds for the company over the coming months, coupled with a sizable reduction in margins, prompted us to reduce our price estimate for Las Vegas Sands’ stock downwards from $69 to $62.

A Quick Look at Las Vegas Sands Revenues

Las Vegas Sands reported $13.7 billion in Total Revenues for full-year 2019. This included five divisions:

• Casino: $9.8 billion in FY2019 (72% of Total Revenues). It includes income from regulated gambling activities at the company’s properties. Macau and Singapore properties contribute 72% and 22% of the casino revenues, respectively.
• Rooms: $1.7 billion in FY2019 (13% of Total Revenues). It 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: $897 million in FY2019 (6% of Total Revenues). It includes income from restaurants at the company’s properties.
• Mall: $716 million in FY2019 (5% of Total Revenues). It includes rental income from retail stores at the company’s properties.
• Convention, Retail and Other: $546 million in FY2019 (4% of Total Revenues). It includes income from business conventions at the company’s properties.

Resorts operations account for nearly 80% of Sands’ total expenses

• In 2019, Las Vegas Sands incurred $11 billion in total expenses, including operating expenses of $10 billion, non-controlling interests of $606 million, and income tax of $468 million.
• Notably, direct expenses associated with casino operations were $5.3 billion (nearly 50% of Sands’ expense base) – something that is understandable given that the company generates almost 70% of its total revenues from the casino business
• General and administrative expenses are the second biggest expense category for Las Vegas Sands (about 10% of Total Revenues) and include payroll, marketing, property taxes, and other maintenance costs.
• Sands recognizes G&A expenses and direct expenses associated with Casino, Rooms, Mall, F&B, and Convention businesses under resort operations.
• Resorts operations account for nearly 80% of Sands’ total expenses.

General and administrative expenses have remained steady in the last few years

• Casino and G&A expenses account for 53% and 15% of Sands’ total expenses, respectively.
• As casino expenses ($5.3 billion in 2019) primarily include gaming taxes ($3.98 billion in 2019), which are driven by gross gaming revenues, we expect these to decline with the shrinking top line.
• However, general and administrative expenses have remained relatively stable at $1.5 billion in the last few years despite high single-digit growth in total revenues.
• Thus, we expect higher G&A expenditure to weigh on Sands’ earnings and drag its net income margin downwards by four percentage points for 2020.

Macau to head for another year of GGR declines and we remain wary of a recovery in the near term

• Considering a 25% decline in table wagers and occupancy rate at Sands’ Macau and Singapore properties, Las Vegas Sands’ revenues would shrink by 15% to $11.6 billion for the full year 2020.
• Moreover, the company would incur $1.5 billion in recurring general and administrative expenses, whose share of total revenues would increase from 10% to 13% of total revenues.
• Thus, Sands’ net income margin is likely to trend downwards by four percentage points to 16%.
• Trefis has revised its price estimate for Las Vegas Sands’ at $62 per share, using a forward P/E multiple of 26 and a forecast of $2.64 for earnings per share in 2020.

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