Not trying to rain on any parade...just another point of view
Las Vegas Sands LVS
by Sanjay Ayer
Thesis 03-13-2006
Las Vegas Sands is terrifically positioned in the world's two hottest gaming markets.
Sands' signature property is the Venetian Resort Hotel Casino in Las Vegas. The Venetian is one of Vegas' most profitable properties, thanks largely to its convention-driven business model. In 1999, CEO Sheldon Adelson revolutionized the Las Vegas Strip by building the Venetian next to the Sands Expo and Convention Center. Adelson sought to capitalize on the booming Vegas convention market by funneling Expo attendees into the Venetian's hotel rooms, particularly during slow midweek periods. The strategy, which was ridiculed at the time, has been a smashing success. The steady flow of conventioneers has enabled the Venetian to maintain occupancy and room rates that rank among Vegas' best. Sands plans to double down on the Vegas market with the $1.7 billion Palazzo resort, a high-end property scheduled to open in 2007.
The firm now seeks to duplicate its Sin City success in the Far East. Its biggest opportunity lies in the white-hot gaming market of Macau, a small territory in southeastern China. Local tycoon Stanley Ho's 40-year monopoly on the Macau casino market ended in 2002, when the government issued three new gaming licenses. Sands snapped up one of these licenses and was the first Western operator to enter the market, opening the Sands Macao in May 2004. The early results have been phenomenal. The casino generated $280 million in operating profit before depreciation and amortization in its first four full quarters of operation, close to what the Venetian generated in 2005. But here's the kicker: The Venetian cost $1.5 billion to build, while the Sands Macao's price tag was $265 million.
The Macau market generated $5.6 billion in gaming revenue in 2005 and it's growing like gangbusters: We think this figure will surpass $10 billion by 2009. Fueling this explosive growth are Macau's prime geographic location, a booming affluent middle class in China, and loosened Chinese travel restrictions. Sands recently committed to an additional $4 billion investment in Macau, teaming up with some top-tier hotel operators in an ambitious project designed to create the Asian version of the Strip. The cornerstone of this project will be a $2 billion replica of the Venetian, slated to open in 2007.
The opportunity in Macau is matched only by the risks, which is why we consider Sands a high-risk investment. The operating and regulatory environments are still largely unknown, and any substantial changes to the rules could slam the brakes on growth. Also, the amount of gaming tax dollars flowing into Macau's coffers has opened eyes in neighboring Asian nations. Singapore ended its ban on casino gaming in April, and countries like Thailand, Taiwan, Japan, and even China could follow in an effort to get a piece of the action. Finally, because the Macau licenses allow for an unlimited number of casinos, we expect rapid supply growth for the foreseeable future. This building boom, along with Macau's ability to grant additional licenses after 2009, could eventually lead to an oversaturated market.
We love Las Vegas Sands' prospects, but because of these Macau-related risks, we'd wait until the odds are heavily in our favor before purchasing the shares.
Valuation
We have increased our fair value estimate to $45 per share from $40 after accounting for the company's strong fourth-quarter results and adjusting some of our long-term assumptions for its Macau properties. We think an investment in Las Vegas Sands is effectively a bet on Macau, which is a young, rapidly evolving market. In the long run, we estimate that more that two thirds of Sands' profitability will come from Macau, with Vegas accounting for the rest. Sands is a difficult company to value, considering that much of its value comes from two resorts that won't open until 2007. We have estimated revenue and operating income for both of these casinos on the basis of market size and comparable properties. In 2004, Sands sold its Grand Canal mall in the Venetian, and it plans to employ this strategy at its two new properties as well. By selling the retail space at the Palazzo and the Venetian Macao, Sands will effectively reduce its net investment in both casinos by a substantial margin. We use a different cost of capital for each of Sands' four properties, with the blended figure working out to about 11%. If Sands were to win licenses in new gaming jurisdictions such as Singapore, our fair value estimate would probably increase.
Risk
The risks associated with Las Vegas Sands mostly center on Macau. If China were to clamp down on gaming--or legalize gaming on the mainland--growth in Macau may not materialize as we anticipate. Vegas carries some risks as well, particularly in relation to intensifying high-end competition; a large amount of new upscale capacity is scheduled to come online around 2008.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
Las Vegas Sands 1,741 23,363
* Wynn Resorts 453 7,713
* MGM Mirage 6,482 12,350
* Harrah's Entertainment 7,111 14,637
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 12-31-2004
Strategy
Sands leverages its convention space in Las Vegas to drive superior occupancy and room rates at the Venetian during traditionally slow midweek periods. This strategy has been a hit, and the firm is hoping to replicate its success in Macau. Sands plans to invest $4 billion in a project designed to transform Macau from a day-trip gaming venue into a full-fledged, amenity-filled destination market.
Management & Stewardship
Sheldon Adelson is one of the pioneers of today's Las Vegas Strip. He founded Las Vegas Sands in 1988 and remains its chairman and CEO. Adelson proved to be a visionary with the convention-driven business model he employed with the Venetian; the once-ridiculed strategy is now commonplace on the Strip. He is making a similarly risky bet in Macau, and thus far it has paid off in spades. Adelson was the founder of computer trade show Comdex, which he sold in 1995 to Softbank. His senior management team is filled with seasoned operators. We give Sands a C stewardship grade, as we have several concerns about its corporate-governance policies. Outside shareholders have virtually no say at the company, as Adelson owned about 87% of Sands stock as of year-end 2004. Also, the board of directors, which is staggered, is majority controlled (four of the seven spots) by insiders. Executive compensation was extraordinarily high in 2004, as one-time cash incentives were granted to management for arranging the financing and sale of the Palazzo shopping mall (Adelson received a $30 million bonus). In February, Sands filed for a secondary stock offering in which Adelson will sell 55 million shares, bringing his ownership stake down to about 70%.
Profile
Las Vegas Sands owns and operates the Venetian Resort Hotel Casino and Sands Expo and Convention Center in Las Vegas as well as the Sands Macao casino in Macau, China. The Venetian opened in May 1999 and was expanded in June 2003 with the 1,000-room Venezia hotel tower. The company's two new casinos, the Palazzo and the Venetian Macao, are slated to open in 2007. The Palazzo will be adjacent and connected to the Venetian on the north end of the Vegas Strip.
Growth
Sands' growth prospects are terrific. In the near term, Sands Macao and spruced-up entertainment offerings at the Venetian should drive growth. The firm will get a big shot in the arm in 2007, when the Palazzo and Venetian Macao are slated to open.
Profitability
The Venetian is one of the most profitable properties on the Strip, helped by its large proportion of high-margin nongaming revenue. Despite the much higher gaming tax rate in Macau, we think the lower labor and marketing costs will enable Sands to generate similar margins there.
Financial Health
Sands, which went public in late 2004, will need to incur significant additional debt to fund its new projects. We believe it can keep its leverage ratios at reasonable levels, however, thanks to strong cash flows from the Venetian and Sands Macao and proceeds from retail space sales.
