LVS: MAKING A CALL TO NOT MAKE A CALL

LVS will miss the current Q4 and 2009 estimates but for the first time in a while the Street is not that far off. Our numbers are only 5-10% below the Street’s, and we think that if LVS survives its credit crisis in 2009, 2010 numbers and beyond are probably reasonable. However, we are also aware that given the somewhat binary set of outcomes that LVS faces, and hence “balanced risk-reward” at current stock prices, investors probably aren’t losing a whole lot of sleep about 2010 and beyond.

The incredible volatility in LVS’s stock should provide levels for long and short traders. We’re on the sidelines at this level waiting for the volatility coach to give us an opportunity to jump in the game. In the meantime we’d like to throw out some plays for both bulls and bears.


NEGATIVES:

 LVS is likely to breach the leverage covenant of its Macau credit facility in Q2 2009 unless drastic steps are taken

 The Macau Rolling Chip environment may be decimated by the credit crunch over there.

 In 2007, Venetian Las Vegas promotional spend was 18% of casino revenues, YTD promotional expenses are running at 33% of casino revenues. LVS has just recently started using promotional dollars to lure in slot players, so we believe that promotional spend will probably be around 40% in 2009. Same goes for Palazzo - In absolute dollars, promotional spend at Venetian & Palazzo was $76MM in 2007 and $146MM YTD 2008

 ADR at the Venetian was $259 in 2007 vs. approximately $242 YTD in 2008. Given the weekly STR #s and the offer’s we’ve been getting from Vegas casinos, we believe that ADR will be down about 15% in 4Q08 and deteriorate further in 1Q09. The opening of City Center in 4Q09 isn’t going to help ADR’s recover. We estimate that the cost of cleaning a room is about $70-75, so you can guess where our hotel EBITDA margins are heading

 While the Venetian Macau has been ramping up well during the last 3 quarters, we believe that they will experience significant cannibalization with the opening & ramp up of the Four Seasons


POSITIVES:

 In 3Q08, Venetian Las Vegas held about 10% and Palazzo held about 16% on table games, costing these two properties about $33MM of lost revenues & EBITDA. Assuming normal hold next year, this easy comparison should soften the blow of lower drop

 LVS has implemented a cost savings program that should save them an incremental $50MM or so in 2009

 We believe that in 2Q-4Q08, LVS had one of the higher commission rates in Macau set at 45% (all-in for F&B credits). With the commission potentially capped at 1.25% or 40% currently, this could provide some margin relief for their properties in 2009

 Sands 1H08 results experienced massive cannibalization as Venetian Macau ramped up and have seen some decent recovery in 2H08 which provides an easy comparison

 With most of LVS’s debt linked to LIBOR and other floating rates, LVS will benefit from the massive drop off in rates -3 month LIBOR rates were 1.09% on 1/16/2009, down from average of 2.9% in 2008

 LVS should have positive working capital in both 4Q08 and 2009, generating an estimated $175MM of cash over the next 5 quarters
o Construction Payables should begin to ramp down
o Accounts receivable should also ramp down as LVS has tightened credit extension to players

 LVS’s credit troubles are with the banks, which are more incentivized to provide the company covenant relief at a “price” than would bondholders.
o Banks have $9.5BN of credit exposure to LVS
o Gaming licensing requirement provide a huge deterrence to banks taking the keys in an event of default
o Lack of a transaction market means that even if Banks took the keys, they probably couldn’t sell the properties


Anna Massion
Director

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