2023-03-31 14:42:07 ET
Summary
- In the last three years, Las Vegas Sands’ operations have been brutally destroyed by the covid pandemic, especially after the Chinese government implemented the zero covid policies.
- Despite the shutdown, Las Vegas Sands’ fundamentals remained strong, and the company took this temporary stoppage to review its business strategy and set the basis to strengthen itself for future growth.
- With China finally reopening, we can expect Las Vegas Sands to go back to delivering solid results and represent a good investment opportunity.
Investment Thesis
With China reopening its borders, and tourism returning more towards normality, Las Vegas Sands (LVS), the leading casino and resort operator in Macao, is ready to welcome the flow of people arriving to gamble and relax in its magnificent resorts.
In the last three years, Las Vegas Sands' operations have been brutally hit by the covid pandemic, especially after the Chinese government implemented the zero covid policies that forced the country into prolonged lockdowns while the rest of the world was slowly coming back to normality.
Despite the shutdown, Las Vegas Sands' fundamentals remained strong and the company took this temporary stoppage to review its business strategy and set the basis to strengthen future growth. With the lifting of covid restrictions, Las Vegas Sands appears to finally be ready to recover its pre-pandemic levels and likely exceed them.
In today's analysis, we will assess why Las Vegas Sands represents a good investment opportunity at today's prices given an intrinsic value of $66.97 per share.
Business Model
Las Vegas Sands' operations are primarily focused in Macao and Singapore where, along with another handful of companies, they have been granted by the local authorities exclusive concessions to operate casinos and resorts.
Macao is a special administrative region of China, as well as the only one where gambling is legal. Las Vegas Sands is among the six companies that received the concession to operate casinos from the Macao government. In Macao Las Vegas Sands operates several Integrated Resorts like The Venetian Macao, The Londoner Macao, The Parisian Macao, The Plaza Macao and Four-Season Macao.
In Singapore, where it was granted one of the two exclusive concessions, Las Vegas Sands operates the famous Marina Bay Sands, which other than being one of the biggest and most expensive casinos ever made, has become an integral part of the city, attracting millions of tourists every year thanks to its magnificent architecture.
Prior to February 2022, Las Vegas Sands operates the famous and historical Venetian Resort in Las Vegas but with the shift to Asian markets, the management decided to divest completely from the Strip selling the building to Apollo Global Management and VICI Properties for $6.4 billion.
Las Vegas Sands operates so-called Integrated Resorts, comprising casinos, premium hotels, convention and exhibition facilities, retail malls, celebrity chef restaurants, and other amenities.
Revenues are generated primarily by table games, which accounted for 71% pre-pandemic, followed by hotel rooms and restaurants which accounted for 13% and 6% respectively. The Macao segment accounted for 64% of total revenues and Singapore for 22.5% before the pandemic. In 2022 Singapore accounted for 61% and Macao for 39% as the Macao segment had to face severe covid restrictions while Singapore reopened way quicker.
Operating Performance
Looking at Las Vegas Sands' past operating performances, between 2012 and 2019 revenues remained stagnant floating around $12.5 billion, but after the covid pandemic hit, revenues more than halved stopping at $4.1 billion in 2022.
The operating margin and the return on invested capital ((ROIC)) were very strong before the pandemic, registering a 5-year median value of 27.4% and 22% respectively, but with the tourism industry shutdown and the high fixed costs, the operating income turned negative in the last 3 years with consequent negative operating margin and ROIC.
Las Vegas Sands operating margin & ROIC (TIKR Terminal)
The same happened to the free cash flows to the firm ((FCFF)), Las Vegas Sands managed to deliver solid and consistent FCFF in the past years, averaging around $2.9 billion, but when the pandemic hit FCFF turned negative.
Financially Las Vegas Sands has a negative net cash position of -$9.8 billion, but high leverage is typical for developers and operators of properties, and before the pandemic, they had a median interest coverage ratio of 9.7.
Market & Risks
As regards the risks involving Las Vegas Sands, competition doesn't represent a big threat since new entrants can't emerge given the limited number of concessions permitted. As regards macroeconomic risks, the pandemic surely impacted Las Vegas Sands' business model, but we are starting to see the light and the end of the tunnel with covid restrictions being lifted all over China.
However, a major risk concerning Las Vegas Sands is the pending litigation with the Asian American Entertainment Corporation ((AAEC)) for $12 billion, that, if eventually results in favor of AAEC, would probably determine the bankruptcy for Las Vegas Sands.
Back in May 2022, Macao's Court of First Instance already ruled in favor of Las Vegas Sands, but AAEC appealed the court decision, therefore, the $12 billion compensation might still be pending in Las Vegas Sands' future.
Growth Drivers
Moving on to Las Vegas Sands' growth drivers, as a property developer and operator company, its major growth driver is represented by the development projects it undertakes.
During the 10-year lasting concession granted by the Macao government, Las Vegas Sands committed to spending $3.77 billion to build gaming and non-gaming facilities on the Macao territory as a boost for the country's tourism industry.
As regards Singapore instead, in 2019 Las Vegas Sands entered into a second development agreement with the Singapore Tourism Board of the duration of 8 years and worth $3.3 billion, to expand the Marina Bay Sands resorts.
Therefore, the total development projects amount to more than $7 billion. This will represent Las Vegas Sands' major growth driver for future revenue growth.
Future growth can be determined by looking at how much and how well a company has invested in its growth drivers. The Reinvestment Margin shows what percentage of revenues has been reinvested into the company, while the Sales to Invested Capital ratio, shows how much revenues have been generated for each dollar invested by the company. If we multiply these two values and take the median value over the years, we obtain the expected growth rate in revenues based on how much and how well a company has invested in its growth drivers.
To calculate a fair Reinvestment Margin, excluding the disruption that took place because of the pandemic, we can divide the $7 billion worth of development projects by the average revenues before the pandemic, equal to $12.6 billion. This results in a Reinvestment Margin of 56% that, multiplied by the average Sales to Invested Capital ratio for the period of 0.9, equals an expected growth rate of 50.62% over the next 10 years.
In our case, adjusting the 10-year growth rate to its annual equivalent rate, Las Vegas Sands' expected growth rate is 5.25%.
Las Vegas Sands expected growth rate (TIKR Terminal)
Projections
Trying to project Las Vegas Sands' future performances, we will assume its operations to partially recover in 2023 while by 2024 and beyond we will assume Las Vegas Sands to firstly return to its pre-pandemic level and then exceed them as the new investments will pay off.
Starting with revenues, I've assumed Las Vegas Sands to register revenues of around $8 billion in 2023, and $12.6 billion by 2024, equal to its average revenues before the pandemic, and after that, we can apply the expected growth rate of 5.25%. With these assumptions, revenues are expected to be around $18.5 billion by 2032.
As regards future efficiency and profitability, again we will assume both the operating margin and ROIC to remain below their historical value in 2023, as the company have to fully recover from the shutdowns, and then after 2024, we can assume Las Vegas Sands to fully reach its historical operating margin and ROIC of 27.4% and 22% respectively.
With these assumptions, the company is expected to return to generate solid and consistent FCFF, expected to be around $3.7 billion by 2032.
Valuation
Applying a discount rate of 7.79%, calculated using the WACC, the present value of these cash flows is equal to an equity value of $51.2 billion or $66.97 per share.
Conclusion
Given my analysis and assumptions, I believe Las Vegas Sands' stock is undervalued at today's prices.
Las Vegas Sands surely faced tough times in the past three years, witnessing the severe hit to its business model, but with China finally reopening and the flow of people seemingly willing to return to enjoy its Integrated Resorts, we can expect Las Vegas Sands to go back to delivering solid results. For these reasons, other than the $12 billion pending litigation that, unlikely or not, might even wipe out the company in a worst case scenario, Las Vegas Sands represents a good investment opportunity.
For further details see:
Las Vegas Sands: A Buy Betting On China Reopening