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Takeaway: Q2 is a wildcard for the stock but 2H 2015 and 2016 headwinds are stiff and valuation is high


For the first time in many quarters, for any Macau operator, we’re actually in line with Street EBITDA estimates for a quarter.  That’s the good news.  Lucky play on the Macau VIP tables could be a $30m contributor to EBITDA (3%) and is probably the reason we’re in line.  Not exactly bullish but it may be good enough.  We’re actually not sure how the stock will react to Wednesday’s Q2 earnings release.  However, we believe estimates are ultimately headed materially lower owing to declining [high margin] base mass, falling market share (already happening in July), too optimistic non-gaming expectations and a full valuation.


As you can see from the following chart, Hedgeye is very much in line with the Street for Q2 revenues and EBITDA.  It’s unclear whether high VIP hold in Macau is reflected in the Street estimates but it is in the Hedgeye projection.  Our projections are not much different than those laid out in our monthly Macau conference call on July 7th.


We don’t have a specific call on the stock action immediately following the Q2 release but do believe the stock is ultimately headed lower. Here are the push and pulls for Wednesday night:

  • Dividend – The odds are pretty high and seem to be priced in that there will be no change in the dividend policy.  Any softening of management’s tone regarding protection of the dividend would be a huge negative for the stock.
  • High hold % – We know LVS held high at Sands Macau, Four Seasons, and Sands Cotai Central.  It’s unclear whether high hold is reflected in consensus.  In our model, we’re projecting a $30m positive contribution from good luck (3% of overall EBITDA).  Gaming stocks will sometimes trade up on a meet or beat even if it is related to luck, but that is usually short-lived.
  • Base Mass – Another significantly down quarter in this segment should force down 2015 and 2016 estimates given the high margins in this area.
  • Non-gaming - The Street pays little attention to non-gaming revenues as Macau is seen as a gaming market. However, RevPAR and other non-gaming revenues are headed materially lower, much of which will drop to the bottom line. At some point, the analysts' models will have to reflect that.
  • MBS – We’re slightly higher than the Street on EBITDA from the Singapore property but this property is always a difficult one to model.
  • Forward commentary  – While management may positively spin some of the government signals of late, the data suggest July is not a good month for the market, nor is it good for LVS.  How much of LVS’s 2%+ share loss vs trend is due to new competition from Galaxy Phase 2 and how much is hold related?  Phase 2 does seem to be ramping, at the expense of the market, and it is targeted at LVS’s core segments.

2015/2016 OUTLOOK

While our Q2 estimates are consistent with the Street, we remain well below for 2015 and 2016 as shown in the chart below.  Our primary concern remains the trend in Base Mass – the highest margin segment - that appears to be eroding faster than the Street expects.  Our analysis of average minimum table bet levels (see our most recent analysis, “MORE MACAU PRICE CUTTING” on July 10th) shows more elevated minimum bet cuts for Base Mass than even Premium Mass.


The following chart shows the breakdown of Mass between Premium and Base for the last several quarters for Sands China.  Following a flattish Q4, Base Mass revenues began to fall YoY in Q1, 2 quarters behind the first Premium Mass decline.  We believe Base Mass will continue to decline, possibly throughout 2016 which will have significant margin and EBITDA ramifications.


Moreover, we think LVS market share is at risk.  Following a few hold-aided months, market share appears to be headed south.  At 22.0%, LVS’s market share is tracking 220bps below recent trend during July month to date.  Galaxy Phase 2 has not grown the market and appears poised to continue to steal share, much of it from LVS.  Supply growth over the next 2 years will be aimed squarely at LVS’s Base Mass segment.  The hotel segment and other non-gaming should also be a drag on YoY profitability with room supply peaking at ~25% next year in an already declining rate environment.  LVS is the most exposed operator to rooms.


Stock action on Thursday could go either way but the intermediate trend in the stock price should be lower. There are just too many headwinds for the Macau market in general and LVS in particular to justify a 13-14x EV/EBITDA multiple, at the high end of the historical range.