LVS: BULL VS BEAR FACEOFF

The stock has blown through normal valuation constraints but the catalysts remain generally positive.

BULL:

1.  Macau is ripping

  • up 18% off a 40% August comp
  • up 60% MTD in September

2.  October should be huge in Macau

  • 60th anniversary of founding of People’s Republic of China is October
  • 9 holiday days this October

3.  Earnings are going higher – We are projecting $295 million in company EBITDAR for Q3 vs the Street at $250 million

4.  Easy monthly comparisons

5.  Stimulus and liquidity boosting VIP

6.  Visa restrictions were loosened

7.  On track for IPO

  • Likely a high multiple 12-14x
  • Resolution of credit issues

8.  Macau is only gaming market with excess demand

  • Beijing controls the visitation spigot but wants growth
  • The high margin Mass business should grow every year for a long time
  • Mass is stable and predictable month to month

9.  Singapore opening in the spring

  • Investors may get excited into the opening
  • Could lead to a lower gaming tax rate in Macau

10.  Easier Las Vegas comparisons

THE BEAR RETORT:

1.  The “rip” is mostly lower margin VIP

  • The Venetian and Sands are primarily Mass market properties
  • LVS lost 5-6% of market share in September MTD versus August

2.  All good things come to an end

3.  The numbers will be higher for Q3 but some of that is hold %.  Both the Venetian and Sands are holding around 75bps above the normal range of 2.85-3.00%

4.  VIP comps are easy, Mass less so

  • Mass be in growth mode too but there are huge supply hurdles on the Mass side
  • 25% Mass table supply growth from December 2009 to May 2010
  • Sands will face a big competitor in Oceanus beginning in late December/early January.  The average analyst has Sands EBITDA up significantly in 2010 despite a new, direct competitor with a significant locational advantage

5.  LVS management not getting too excited about VIP given the volatility and tendency of this segment to “bubble”

6.  Beijing can always tighten visa restrictions again and will do so to prevent “overheating”.  This is good and bad.  Investors shouldn’t get too excited about near term surges or declines

7.  Probably cannot actually float the IPO until November.  Multiples could change in the interim

8.  Mr. Bear cannot really debate this one

9.  A lot of risk associated with such a large capital investment

  • Regulatory hurdles will keep junket involvement low – slows the ramp
  • Will cannibalize Macau operations – VIP tax rate is 30 percentage points lower
  • Will open after Genting
  • Can one really put a 14x multiple (as some on the sell-side have done) on Singapore EBITDA given the risks?  The property hasn’t even opened up yet!

10.  True, but is business really getting better in Las Vegas?  We have not seen any evidence of that

WARNING SIGNS 

Catalysts and momentum drive LVS, MPEL, and WYNN.  Investors should never lose sight of that.  LVS may be expensive, but it can continue to run as long as the catalysts are positive.  However, at least for LVS, there are some warning signs that won’t matter until they do and then they will really matter. 

  • Mass table supply growth:  This is a big issue for LVS given the business model.  The opening of Oceanus will likely reduce Sands EBITDA next year, even if the market continues to boom.  Moreover, overall supply growth will be around 25% for the first half of 2010.
  • Potential VIP bubble:  Investors have gotten very excited about Macau market growth but most of it is in VIP which is very much a “bubble and pop” segment fueled by stimulus and liquidity.
  • Market share dip:  LVS may lose 5-6% in market share in September due to the VIP market surge.  Venetian and Sands are not getting their share of the market growth.
  • Check those models:  Many analysts are using the wrong share count in their models and target price derivations, forgetting the warrants that were issued earlier this year that are now in the money.  We wrote about this in our note entitled, “CHECK YOUR MODELS” (9/14). “For example, this week, one sell-side analyst upped his price target but is using 659 million shares, instead of the correct 815-825 million shares.  His new $24 price target should have been $19 and his rating should be Market Perform, not Outperform.  Look for that analyst to raise his property multiples even more to justify the rating when he figures out his error.
  • 14x EBITDA?  Analysts know this is a momentum group of stocks.  Target multiples continue to get raised as stock prices go higher.  Target multiples are starting to get to unreasonable levels.  For instance, we saw one sell-sider up his target multiple on Singapore to 14x, the same as his Macau multiple.  14x is high even for Macau but Singapore is not even open.  What about risk? 

CATALYSTS REMAIN POSITIVE 

For now the catalysts are positive.  In addition to the upcoming monthly Macau revenue growth prints, we actually think the Street is way too low on LVS earnings.  Our $295 million EBITDAR projection is 20% above the Street.  So the Bear thesis, however valid, probably won’t matter over the near-term.  We just want you to be prepared when it does.