2023-05-10 02:29:53 ET
Summary
- Las Vegas Sands has one of the best management teams and capital allocators in the industry.
- They have shifted their focus to Asia, and that brings a whole new set of risks.
- They will probably make fantastic returns there, but I could not sleep well knowing that they are exposed to a risk that they cannot influence.
Thesis
Las Vegas Sands ( LVS ) is one of the largest gaming companies in the world and has decided to focus on the Asian market following the sale of its Las Vegas operations. Prior to COVID, they had strong ROIC, margins and profitability. And I am very confident that they will return to these levels in 2024 and beyond, but the China risks make it uninvestable for me, despite having fantastic future growth prospects and a strong management team.
Analysis
Recent first-quarter results showed a strong improvement, although Macau is still well behind the 2019 numbers. So there is still plenty of room for LVS to grow. Revenue increased by 128% year-on-year and Marina Bay Sands achieved an all-time high in mass gaming revenue.
With the recent opening of China in the first quarter of 2023, we have started to see an improvement in visitor numbers, but they are still only around half of what they were in 2019, so there is still plenty of room for further growth.
And the airport volume is even lower at 39% of what it was before COVID, so I would argue that the normalized earnings that we will hopefully see in 2024 will be very strong. Combined with Macao's $3.8 billion investment commitment, which management says is just a starting point , Macao has great potential for the future. With full rooms, more quality customers and more hotel rooms, entertainment, food and beverage in what is arguably the largest gaming market in the world, the future looks bright.
The Asian market's high net worth customers with a passion for gambling is the perfect environment for LVS. They also have high barriers to entry because of licensing, but the 30% of revenue that has to come from non-gaming could have a bit of an impact on margins. Still, in terms of market potential, Macau will probably be like Las Vegas on steroids. But the China risk is something that every investor needs to be aware of, it could lead to big problems in the future.
Singapore, on the other hand, is a little further along in terms of recovery, at 78% of 2019 volume, but with Marina Bay Sands being one of ASIA's most iconic attractions and its expansion plans, the future also looks bright.
As gaming companies tend to be a little more leveraged than other industries, it is always important to look at their debt situation and LVS has a strong balance sheet with $6.53bn in cash and equivalents and also a good revolving credit facility which provides strong liquidity.
With FCF also expected to normalize in 2024, the big chunks of debt coming due in 2025 and 2025 should not be a big deal now. If we look at the FCF yield from 2015 to 2019, it has averaged around 6% and if they can get back to that level, FCF should be more than enough to cover debt and interest and also return money to shareholders.
At the moment the EV/EBITDA multiple looks way overvalued, but I would argue that in terms of normalized earnings it should be about half, so in the 25x range, which is still expensive but more reasonable given the quality of the business and the future growth prospects. LVS is one of the best in their market in terms of capital allocation, their ROIC had a strong 5 year average of ~15% pre COVID and they are targeting a 20% ROIC in Macau. Competitors such as Caesars (CZR), which I wrote about , had ROICs in the low single digits.
Growth Opportunities
I think Asia is going to be a fantastic business opportunity in the future as more and more people get rich in China, Singapore and India and there are a lot of gambling addicts in China in particular. Approximately 2.5% to 4% of the Chinese adult population is addicted to gambling and if you multiply that by their population you get a very large potential market. And if they can match their past returns on capital with their developments in Macau and Singapore, it will lead to fantastic returns for shareholders. At the moment, I see no evidence that management is incapable of doing that.
In addition, there will hopefully be an opportunity in New York, probably in the first quarter of 2024, but there will be competition from Atlantic City. Thailand is another market they have their eye on.
Conclusion
LVS is an exceptionally well run company with impressive capital allocation and a strong balance sheet in a market with high barriers to entry. They also operate in what is probably the largest gaming market in the world with the highest future growth rates. Unfortunately, it is also the most dangerous. If it were not for the China risk, LVS would be a fantastic investment with all the tools to deliver strong double-digit annual returns over the long term.
However, the high level of uncertainty around political risk in China and US-China relations makes this an investment with so many variables that could have a strong impact. Therefore, and this could be a mistake, I do not see the rewards outweighing the risks. However, the experienced management team at LVS have looked at the potential risks and decided that the attractive market is worth it and offers them a good risk/reward. So it will be an individual decision for each investor whether to take this risk.
For further details see:
Las Vegas Sands: Means Betting On Asia