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Morningstar | Action and Results Support That Sands Will Lead in Macau's Attractive Long-Term Growth Opportunity

Despite fears around a trade war and China's economic slowdown, the Macau (55% of EBITDA) gaming market and narrow-moat Sands' competitive positioning remained strong in the third quarter, and we maintain our long-held view that the region presents attractive high-single-digit annual sales growth long term. While we currently model for a temporary Macau cyclical downturn in 2020-21, we think the 35% pullback in shares since June presents an opportunity to own the world's leading casino operator at an attractive margin of safety to our $72 fair value estimate, which we don't plan to materially change.

Sands' Macau revenue grew 13% (tracking toward our 2018 10% growth estimate), ahead of the 10% industry gaming growth in the quarter. Further, the company grew its mass and VIP win per table 18.4% and 15.3%, respectively, versus the market's 17% and 3% gaming sales lift. Importantly, we think investors have been too fixated on the year-over-year deceleration of industry gaming growth, and instead should note the two- and three-year stacked gaming growth trends that have remained resilient, which to us implies underlying health. We also believe the market is applying too high a probability that Sands' Macau gaming license won't be extended in 2022, as our long-held view remains that the company has done more than the Chinese government has asked, investing $13 billion in the region so far with a leading nongaming presence (50% share among the six licensed operators) that helps drive economic propensity in Macau. And investors should take note that Sands now plans to invest an incremental $500 million in its existing facilities through 2020 (taking its total investment in the region to $15 billion), as this indicates confidence that the company expects to be operating in Macau for a long time to come. Also, the $300 million in repurchases during the quarter, nearly matched last year's total, signaling that Sands see attractive long-term value in its share price.

Encouraging win per table was higher at all five Macau integrated resorts during the quarter, while total Macau EBITDA margins grew 80 basis points to 35%. With year-to-date EBITDA margins up 190 basis points to 35.7%, we don't expect much change to our forecast for a 140 basis point expansion to 34.9% in 2018.

Singapore (35% of EBITDA) saw a 3% sales decline, as VIP volume remained weak, but the 1.3% year-to-date revenue lift is tracking near our 2% growth estimate for 2018, so we don't expect any material change here either. Nor do we plan to alter our 2018 EBITDA margin estimate of 55% (down 60 basis points), as EBITDA margins are up 60 basis point year-to-date, but were lower by 130 basis points in the quarter. Meanwhile, Las Vegas' (10% of EBITDA) year-to-date 3% revenue growth and 80 basis points of EBITDA margin expansion, is tracking directly in line with our 2018 forecast.

Finally, as substantiated in our October 2018 report "World's Next Large Integrated Resort Opportunity on the Horizon," we continue to see Las Vegas Sands as best positioned to win the Osaka license in Japan, which in our view, is the largest opportunity of the three concessions to be awarded in the island nation, representing $12.8 billion in total revenue when opened in 2025.

We look forward to Las Vegas Sands' participation at our annual conference this November.