Based on the growth prospects of established markets, such as Macau and Singapore, in which Las Vegas Sands (LVS) operates, as well as the company's financial turnaround in the last few years, its future plans and expected results, we have a positive stance on the company. We also maintain this stance as the sell side analysts have started to make valuation comparisons with consumer giants such as Tiffany (TIF), Coach (COH), Nike (NKE), Yum Brands (YUM) and Ralph Lauren (RL), as opposed to the traditional Wynn Resorts Ltd. (WYNN) and MGM Resorts International (MGM). LVS has become a global consumer play and it should enjoy premium valuations.
The Resorts and Casinos Industry is comprised of companies operating standalone resorts, casinos, or a combination of both. The major players in the industry offer a mixture of both to attract tourists and generate revenues through various services, including casinos, rooms, food and beverages, and entertainment. However, the major part of the revenues is generated through the casino business alone.
The Resort and Casinos Industry is mostly concentrated in Las Vegas, and other selected international destinations like Macau etc. However, in the recent past, various states in the U.S. and governments across the world are allowing the development of these massive casino resorts to promote job creation and attract tourists.
The Resorts and Casinos Industry is highly cyclical and is linked directly with domestic and international economic conditions. As was witnessed in the 2008 financial meltdown, most casinos witnessed their profitability shrink, and some had to face major losses due to the reduction in disposable income.
Macau, the casino capital of Asia, is growing at a rapid pace due to the growth witnessed in Asia. Most companies have either already invested in this market or are in the process of expansion.
Japan has been at the center of attention as lawmakers are in a continuous debate on whether to allow the establishment of casinos in the country. Japan, with one of the highest GDP and per capita incomes, is a gold mine for these companies to invest in, and any development of this front will be a major trigger for the industry.
Las Vegas has been out of the limelight due to sluggish consumer spending; however, a pick up on this front will be a trigger for the Resort and Casino Industry.
This industry is linked directly with the Transportation and Tourism industries, and any slowdown in these industries adversely affect the Resorts and Casinos Industry, since resorts are a means to attract clients into the casinos, which is the main revenue earner.
The Casinos Industry is also at a risk due to changes in local and state governmental laws, and regulations, including gaming laws and regulations.
Consumer spending is a function of economic growth, and any slowdown in the economies of China and the U.S., or the debt crisis collapse in Europe, will hamper consumer spending. This would negatively affect the Resorts and Casinos Industry and is a key risk to our investment thesis.
There are three divisions in casinos, namely the main hall for walk-in customers, slot machines and the VIP gaming area.
Incorporated in August 2004, LAV is a global developer and operator of integrated resorts, featuring accommodations, casinos, entertainment and retail, convention and exhibition facilities and other amenities. LAV's developmental and operating activities are concentrated in three geographical areas: Macau, Singapore and the United States.
The company witnessed a major turnaround after generating losses in 2008 and 2009, due to the financial meltdown and bad financial management. It turned profitable in 2010 and has witnessed significant growth in its profitability ever since.
The 1Q2012 EPS of $0.70/share witnessed a growth of 89% compared to $0.37/share in 1Q2011, across all geographies. The 1Q2012 result came in higher than the market expectations of $0.60/share. Going forward, the expectations for 2Q2012 and CY2012 are $0.62/share and $2.67/share.
The company has a total debt/equity ratio of 112% as compared to the industry average of 85%.
The casino segment contributes about 82% of the revenue, followed by the room's contribution of 9%, in net revenue. The casino revenues for 1Q2012 increased by 36% YoY.
The breakup of the EBITDA contribution is 44% Singapore, 43% Macau, 11% Las Vegas and 2% Bethlehem.
The company announced a second quarterly dividend of $0.25/share in April and is offering a dividend yield of 2.21%.
Growth in different geographic locations
Macau witnessed strong mass table and slot growth. It recorded an increase in non‐rolling drop and slot handle of 9.7% and 53.3%. The VIP initiatives have seen meaningful growth in rolling volume as rolling volume grew by 33.8%. The revenue of the Retail Mall and Hotel increased 29.8% and 18.9%, reflecting the strength of the business integration.
The mass win per day increased 21.5% to $4.47 million per day, and the rolling volume was up by 26.4%. It also continued growth in high margin hotel and retail mall segments.
Las Vegas witnessed its strong table games drop up 27.8%, driven by high‐end baccarat play, and its stronger slot handle up by 18.8%.
The major revenue, profitability and growth contributors in the past, and most likely in the future as well, are expected to be in Asia. Keeping this in mind, LVS has placed itself in a position to take maximum advantage of this future growth.
The company opened the Phase I of its integrated resort "Sands Cotai Central" in April and is expected to increase the market share of LVS in Macau, and contribute to its future profitability. The Phase IIA is expected to be opened in 3Q2012.
China has witnessed commendable growth in its economy, which has increased the disposable income of its middle class. China is expected to encourage consumption locally to drive its economic growth, and has seen increased tourist activity in the last few years. Other growth factors include the ongoing high-speed rail development throughout China, the completion of an inter‐city rail to Macau expected in 2H2012, and the Macau‐Hong Kong‐Zhuhai Bridge is also estimated to be completed by 2015.
The company intends to expand in new markets including Spain, South Korea, Japan and Vietnam in the future. It also intends to close the credit financing facility in Singapore, which will improve its financial strength.
All the aforementioned factors place the company in a position to increase its revenue and profitability going forward.
LVS was upgraded to BB+ credit rating with a positive outlook in April 2012 by Standard & Poor's.
The stock price has increased 17% YTD and 15% in the past one year outperforming the NYSE composite. However, the stock price has decreased 2% in the previous three months underperforming the market.
The company is trading at a forward P/E and P/B ratio of 16.5x and 4.2, which is lower than some comparable peers. It offers a dividend yield of 2.2%, which is higher than comparable peers.
LVS' major competitors include WYNN Resorts Limited and MGM International. Both have operations in Las Vegas and Macau, the two casino hubs.
MGM is expected to post a loss going forward and is trading at a significant discount to its peers, even though the EPS growth of MGM is high; it is not expected to be profitable in the near term.
WYNN is trading at a forward P/E comparable to LVS, a significant premium to its own book value, a lower dividend yield than LVS and a more expensive PEG than LVS. It also has a much higher total debt/equity ratio than LVS. The profitability of WYNN is expected to grow going forward, even though it witnessed a slight contraction in 1Q2012.
1Q2012 EPS growth YoY
EPS Growth Expected
3 month performance
52 Week Performance