Singapore Cityscape at Night Twilight Drone Flight Panorama Mlenny/E+ via Getty Images
Evidence of our contention that Las Vegas Sands (NYSE:LVS) is by far the enigma of the casino sector is the behavior of the stock after China warned China tourists not to gamble in Singapore. Meanwhile, top honchos of US companies, the same week, travelled to Beijing to kiss Xi Jinping’s ring. Investors wary of China dependent stocks may have breathed a sigh of relief. So when that does not seem the case, we have cause to believe it may finally have reached a point where LVS can absorb such news and can hold positive sentiment at ~$50 (price at writing: $52).
gurufocus
The China warning may have rattled the LVS shares big time in the past. However, the market greeted the news with barely a shrug. The reason is twofold. First, LVS’ property, the Marina Bay Sands, has been surging in revenue and profit growth since the end of covid. Secondly, while China gamblers have a high win value, Indonesia, India, and Malaysia are the top three feeder markets by far.
Examining the Yahoo charts macro returns by industry, we find casinos inching single digits ahead. But in the subcategory they show as “gambling” we assume contains all the online betting operators, it surged. With a market weight of 1.37 and a weekly upside of 2.70%, the subsector was still slightly positive against many other areas, including retail. However, on a YTD basis, “gambling” scored a 93% gain. The closest second over several dozen subsections was Leisure, which clocked a YTD upside of 13.99%. Overall, the positive tone on all gaming-related stocks on their industry appraisal supports our thesis that LVS, not totally related to the “gambling” subsector, has benefited from a more positive texture of its prospects.
This continuing puzzle on LVS may well be coming to a support level. That’s meaningful because the ride to our PT of $70 mid this year begins to come into view as results continue to be positive.
Pretty soon, save macro market factors, I expect LVS will ratchet up and keep a positive tone until that PT is reached. More importantly, it will tell us finally that the stock’s long-closed shackles have been removed and Mr. Market finally gets it.
FY23: Highlights Marina Bay Sands/LVS
LVS MBS property led the charge of a powerful recovery year for the parent:
Net revenues: $1.06b up from $682m.
AEBITA: $1.2b
Consolidated 2023 LVS group revenue:
$10.43b vs. $4.23b for 2022 ~up 60%
Operating income: $2.3b vs ($0.082m) in 2022,
Diluted EPS: $1.81 vs ($1.20) in 2022.
Cash on hand: $5.1
Total debt: $14.01b vs. $14.17b for 2022.
Net debt: ~$9b
Current ratio: 1.31 is healthy so as to support a margin of safety related to a company debt profile.
Support at $50: Three weeks before Q1’24 earnings release
Analyst consensus: $0.63 – I am looking for a range of $0.70 to $0.75 targeting a best case $3 per share EPS for 2024.
At writing, the LVS P/E sits at 26.94. Comparative: MGM Intl. Resorts trailing P/E at writing is 13.98. For different reasons, both these sector peers can be expected to achieve P/Es that will make them cheap as both US and Asia thrive.
My bull scenario thesis
I measured the velocity of post-covid LVS revenue recapture against a set of forecasts from official sources in Macau, bulge analyst reports estimates from Singapore industry observers. I found that the pace of actual revenue recovery was roughly 28.8% faster than consensus since 2021 in reaching near or at a pre-covid baseline LVS 2019 $12.2b. I also factored in several macro changes. First, the slowdown of the China economy, second the CAGR estimates for global gaming growth between 2024-2030 at 7.4%
I used benchmark LVS share of market in Macau at over 22%. According to AGB, LVS owns 60% of the Singapore casino market. Projecting ahead we calculate that LVS will generate net revenue of $11.2b this year and before the end of 2025, reach its 2019 high at $12b-but its operating income will be better than it was in 2019. The reason: Considerable cost savings achieved under covid distress between 2-20-2022 will remain in place.
Changing guidance, from my previous article, from BUY to HOLD based on a slower but steadier ramp to our prior PT of $70. Our ramp will need more time but will be more certain.
Since last September 20th in five periodic posts based on my on the ground intelligence from Asia, as well as Quarterly results for LVS, I sustained my PT of $70. This was against market sentiment, which for reasons we could only conjecture, did not see the stock moving anywhere near our call. We stuck with our BUY call nonetheless because it seemed so obvious to us that LVS was well on the way to dramatic recovery from covid and it was not baked into the trade yet.
With this most recent threat aimed at Chinese tourists to avoid gambling in Singapore, my initial expectation was that the stock could have taken a much bigger hit than it did. That is because trading patterns on LVS since 2017 have shown that any saber rattling moves out of Beijing perceived as a shot across the bow of US owned Asian gaming properties usually hit the stock harder.
After the China warning, I revisited my data sets on Singapore gaming in general, and specifically the performance of MBS. I then talked with my Singapore associates to see if they came to the same on the ground appraisals as mine.
All agreed my original PT of $70 was realistic by mid to late Q3’24. I have calculated the DCF value of the shares with a terminus in five years as around $68. Comparing my estimate with several financial sites, I concluded that theirs still showed a slower ramp than mine as indicated above. This is because there are still early post-covid takes that distort results.
However, the irony here is that while the business of LVS is ramping faster than most forecasts, the price action on the shares is still not following results. The innate neutral or negative sentiment on the stock continues in the face of clear evidence that LVS is on the move to powerful recovery.
My reasoning, therefore, is to bring my outlook for the shares in closer tandem with what Mr. Market is prepared to buy or pass on rather than keep the buy scenario, per se.
What I now see is that LVS shares will need more time to build upside momentum regardless of the strong quarterly performance on most key metrics they have delivered. And my immediate take on the virtual no significant downside impact on the China ban in Singapore recognizes confidence at $50, which I think is sustainable.
I see a succession of slow build in a pattern of upside step movement from $50 to $59, then stabilizing around $60 and gathering more support as that holds. Then, in my opinion, the last step which could come by late mid-year, which would bring the price to my PT at $70.
Problems in the macro China economy, specifically in the property sector, wholesale and retail trades, will keep some bear sentiment on the entire sector cool. Our data sets on the demos of Asian casino visitors show a disproportionate weight of self-employed entrepreneurs, cash transaction retailers. The younger demo leans heavier on gamblers from tech industries. We have baked in some softness in visitation from those segments particularly among the upper reaches of premium mass and VIP. But history shows any such downside is compensated by growth in mass play. Gambling is a core part of the Chinese leisure time activity. That has not changed through economic, even political, turmoil over decades.
We continue to believe that at ~$50, by most data points in its most recent performance, LVS shares are cheap. But Mr. Market disagrees as we have noted in our posts. But if the case can be made of support at $50ish, and we think it can, the prudent play now is HOLD. It is not crazy cheap historically, but cheap enough to feel confident in a steady ramp ahead with what we see as a strong margin of safety.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.