Shares of Las Vegas Sands have fallen 30 percent since early May, compared to a 13 percent decline in the overall Hong Kong bourse and a three percent appreciation in the Standard & Poor’s Index. So observes Deutsche Bank analyst Carlo Santarelli in an investor note published today.
“Given the sharpness of the move lower, we felt it appropriate to reconsider our broader thesis around the Macau recovery and the positioning of LVS within the market recovery,” Santarelli wrote. With Sands stock priced so low ($44.84 a share), Santarelli reiterated a “Buy” recommendation and offered a $65 price target on LVS, down from $72 per share.
Noting “uncertainty” about the U.S. economy and consumers’ attitudes toward gambling spending, Santarelli thought stateside investors would have moved toward Sands, which is primarily exposed to the recovering Macau market and Singapore. However, there is a paradox: “The growth outlook offered by the Macau-oriented stocks has not been a reason for investors to gravitate to them of late, yet we don’t believe the market outlook has changed materially, if at all.”
The downward shift in Sands’s share price, Santarelli theorized, was motivated by macroeconomic concerns about China some concerns regarding the company itself. Santarelli counseled patience.
“We see considerable value in LVS shares at current levels and we believe some of the concern around the trajectory of the recovery in Macau is misguided, with too much being read into short term and somewhat inconsequential datapoints,” Santarelli wrote. These factors would, he continued, rationalize over time and Sands was “a compelling long idea moving forward.”
Macau’s high-roller market was, as Santarelli put it, “secularly changed,” given China’s crackdown on junket operators and the movement of currency, translating into fewer VIP players and less liquidity amongst them. This, he estimates, puts a full Macanese recovery to pre-COVID levels a long way off, as VIP play has regained only 35 percent of its previous total. Prior to the pandemic, it represented 46 percent of all Macau gambling revenue.
Some compensation has emerged in the form of greater-than-previous play by premium mass-market customers. However, Santarelli observed, “Base mass continues to lag.” The key for Sands, he continued, would be to continue to build mass-market visitation.
The analyst sees no stagnation in mass-market play, despite disruptions in the form of an August slowdown of visitation and a September typhoon. As package tours are increasing “nicely … the mass gaming market is showing steady performance, with a bias to continued sequential improvement along with visitation over the coming months.”
Sands faces a twofold challenge, in Santarelli’s view, in the form of more gambling inventory and a greater number of hotel rooms among its competitors. The latter form of expansion drops Sands’s market share of hotel rooms in Macau from 45 percent to 40, as the various Galaxy Entertainment hotels add inventory, as does rival Studio City.
“Thus, while hotel-room growth should add to mass market [revenue], it was reasonable to conclude that Sands would shed mass-market dollars to the competition, as its rivals added hotel rooms.”
Still, the company’s shrinkage in its mass-market share (31.6 percent) has been less than expected, “especially when considering [that] not only did their share of rooms decline, but the built-in advantage of having the most room supply in a market largely gets obscured when the market is running well below visitor/occupied room night capacity, as it has, though this too is changing.”
Another factor working in Sands’s favor is labor expense, believed to be 13 percent lower than before the pandemic. Even so, Santarelli believes Sands “has broadly staffed the Macau operations at normalized run-rate levels.”
Santarelli was sanguine about Singapore, saying it would “continue to experience growth and stability.” Sands’s investment in new Singaporean hotel product, he added, would help and the property as a whole was undervalued as a contributor to Sands’ asset base.
