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Morningstar | Sands' Solid Macau Results Offset Any Near-Term Singapore Concerns; Shares Remain Fairly Valued

We see two takeaways from narrow-moat Las Vegas Sands' second-quarter update. First, the company's Macau (60% of total EBITDA) investments are driving strong returns, supporting our view that it will be a long-term share gainer in the region. Second, Singapore's (30%) weaker VIP gaming should not yet be interpreted as a structural issue. Additionally, we reiterate our view that Sands will win one of two urban Japan gaming licenses we expect to be awarded, leading to a resort opening on the island nation during the middle of next decade. We don't plan any meaningful change to our $70 fair value estimate, which models mid-single-digit annual sales growth on average the next five years with operating margins of 32% in 2022 from 27% in 2017 and see shares as fairly valued.

Sands' Macau room renovations are yielding strong results. This is evident in the Venetian property's respective 32% and 44% mass and VIP volume lift (above industry growth of 21% and 13%, respectively), following its earlier investments to upgrade accommodations. This growth was also ahead of the respective 20% and 30% mass and VIP lift seen across its five Macau resorts. We think this provides an investment roadmap that Sands' plans to extrapolate to other Macau properties over the next few years, starting with its Parisian casino, which has already seen a 4 times return on initial suites constructed relative to existing rooms. This investment, along with Sands' leading location, mass, and room share position, support our view for ongoing share gains in the Macau market.

While Singapore saw healthy mass play (win-per-day up 10%) and retail sales (up 3.3%), it posted a 33% drop in VIP volume. We believe VIP weakness is due to the volatile nature of the segment, as play can be concentrated in a few high rollers, but a continued trend of lower growth would suggest that business is being lost to other regions, and could cause us to adjust our forecast, so we will be monitoring this situation.

As substantiated in our June 2017 Observer "The Rising Sun Will Shine Bright on Japanese Integrated Resorts," we expect Las Vegas Sands to win an urban gaming license in the region, due to its strong resort experience in Singapore, Las Vegas, and Macau, as well as its strong balance sheet. We currently model the company to open its resort on the island nation in 2024, and for the property to represent 16% of total EBITDA during that year. That said, finalized details from the recently passed implementation bill could take another year, pushing our expected timeline out a year. As a result, we may adjust Sands' Japanese resort opening date to 2025, resulting in less than a 1% change to our fair value estimate.