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Las Vegas Sands Rides on Diversification, Regulations a Woe


On Oct 9, we issued an updated research report on leading international developer of multi-use integrated resorts primarily operating in the United States and Asia, Las Vegas Sands Corp. LVS.

Diversification – The Need of the Hour

We note that diversification is the need of the hour and Las Vegas Sands is thus consistently trying to diversify its revenue sources. The company remains focused on a convention-based Integrated Resort business model that helps in generating the most diversified set of cash flows and profit from non-gaming segments while bringing unsurpassed economic and diversification benefits to the regions in which it operates. In fact, non-gaming revenues have been relatively better over the past few quarters.

We also believe that properties like Sands Cotai Central and The Parisian Macao are likely to increase the company’s dominance in the Cotai strip, a region where Las Vegas Sands already has a considerable presence. The company would be able to significantly grow its retail business and meetings, incentive, convention and exhibitions (MICE) space. Both these areas of business will aid non-gaming revenues and appeal to middle-class travelers. These projects thus demonstrate the company’s commitment toward diversifying its business as these are not solely meant for gaming.

Meanwhile, the company is concentrating on renovation and promotion of its Las Vegas properties in order to drive segmental performance. The improvement in employment rate and the rise in tourism numbers in the region have been boosting demand at the company’s properties in the region and are expected to continue doing so. Further, the diversification of its resort portfolio and non-gaming options is likely to contribute significantly to revenues.

Macao’s Recovery & Regulatory Issues

A tough operating environment in Macao weighed on casino stocks from June 2014 to most part of 2016. However, Macao's gambling revenues have recovered and have been improving since the second half of 2016 with new resorts attracting high rollers as well as leisure gamblers. Evidently, Macao’s gaming revenues were up in September, thus marking the 14th consecutive month of gains and signaling the casino hub’s recovery.

In fact, Las Vegas Sands’ Macao operations is experiencing strong growth in both its mass gaming and non-gaming segments. Also, its industry-leading Cotai Strip property portfolio in Macao is witnessing strong visitation and higher hotel occupancy rates buoyed by the addition of The Parisian Macao. The resort is expected to continue to attract tourists and leisure gamblers, thereby boosting revenues.

However, the Macao government recently collaborated with the mainland authorities to tackle money laundering and terrorism financing and beefed up its anti-money laundering framework with a much wider scope and stringent compliance measures. Macao's Gaming Inspection and Coordination Bureau (DICJ) is increasing its audits of the junket industry over concerns of money laundering as well.

Thus, this latest crackdown may hamper Macao’s revenue growth and reverse the 14 month streak of year-over-year gains and weigh on Las Vegas Sands’ performance.

Bottom Line

Shares of Las Vegas Sands have jumped 15.7% in the last six months, underperforming 17.3% gain of the industry it belongs to.

Even so, upward estimate revisions for the current-quarter and full-year earnings reflect analysts’ optimism about the stock’s prospects. Given the ongoing recovery in gaming revenues in Macao and continued improvement in the Las Vegas business, the stock should perform well in the quarters ahead.

However, Las Vegas Sands’ The Parisian Macao along with other upcoming resorts at the Cotai Strip faces extreme peer pressure from several Chinese casino operators and other U.S.-based companies. Wynn Resorts, Limited WYNN opened a full-scale integrated resort, Wynn Palace, on the Cotai Strip for over $4 billion in August 2016. MGM Resorts International’s MGM $2.9 billion casino hotel is also set to open in Cotai in the fourth quarter of 2017. We believe these openings might pose a huge threat to the company’s business in the region.

Nevertheless, this Zacks Rank #3 (Hold) company is well poised for growth given a solid business model, extensive non-gaming revenue opportunities, high quality assets, attractive property locations and a fairly favorable macro environment.

A better-ranked stock in this sector is Churchill Downs Incorporated CHDN carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

For 2017, Churchill Downs’ EPS is expected to increase 22.6%.

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