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Morningstar | Las Vegas Sands Remains Best Positioned in Attractive Asian Gaming Markets; Shares Undervalued

We maintain our view that the Macau region (58% of 2018 EBITDA) offers attractive long-term growth, and don't plan a material change to our $70 valuation for narrow-moat Las Vegas Sands, which incorporates mid-single-digit average annual sales growth the next several years with operating margins around 31% in 2023 versus 27.3% in 2018. For reference, Sands' total 2018 sales and EBITDA both grew 8%, near our 7% respective forecast. With shares having recently traded lower on near-term cyclical concerns, we see an opportunity for investors to own the world's leading casino operator.

While we model for a Macau cyclical downturn in 2019, we believe investors should focus on Sands' leading position and long-term opportunity in this market. Macau demand remains robust, evidenced by Chinese visitation growth that accelerated to 14% in 2018 versus the 9% and 0.2% lifts seen in 2017 and 2016, respectively, driven by a growing middle income class, new attractions, and infrastructure improvements. Macau gaming supply is also limited to only six licenses, of which Sands has one. We think this demand and supply dynamic supports high-single-digit annual industry gaming sales growth over the long term. Further, Sands' strong competitive position was displayed by each of its five Macau resorts seeing year-over-year increases in win per table during both the fourth quarter and in 2018. Also, Sands' overall VIP win per table grew 34.6% in the quarter, above the company's calculated market growth estimate of 6.6%, as it benefited from renovations. And we see Sands maintaining its competitive position in the region, as it invests $2.2 billion in its existing resorts during 2019-20, driving total expenditure to date in Macau to $15 billion. Finally, Sands accelerated buybacks to $430 million in the quarter and $905 million for 2018, far outpacing the $375 million repurchased in 2017, signaling the company also sees its shares as undervalued and long-term position as attractive.

Las Vegas Sands' Singapore operations (32% of 2018 EBITDA) produced mixed results. While the resort remained full at 95.5% room occupancy in the quarter, VIP volume dropped for the fifth straight quarter, with mass play also down for the second consecutive quarter. As a result, 2018 sales fell 2%, below our 1.2% growth expectation, although the property's 55.1% EBITDA margin matched our forecast. Although we already model for only low-single-digit annual sales growth the next several years, we might slightly lower our projections for the resort, as we believe the property has reached a higher than previously maturation point, due to a need for more rooms.

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. In our view, it is the largest opportunity of the three concessions to be awarded in the island nation, representing a $12.8 billion total revenue opportunity when opened in 2025.