THE HEDGEYE EDGE
Las Vegas Sands (LVS) has transformed into that rare stock which should appeal to “Growth,” “Value,” and “Dividend/Cash Flow” investors alike. The stock now yields 3x that of an S&P 500 index fund making it very attractive on a relative and absolute basis. Most importantly, these future dividends will be supported by strong free cash flow generation, on the heels of a new property opening in September and improving industry fundamentals. With the tides finally turning in Macau, we see LVS as the best way to express our views that Macau is once again a sustainable, longer term investment.
After 25 months of consecutive GGR declines, Macau is finally set to snap its losing streak, being led by the more profitable mass segment. From the six Macau concessionaires, LVS has the least exposure to the shrinking VIP segment (~10% of EBITDA), while ~90% of their EBITDA is generated from Mass, Slots, and Non-Gaming Revenues (the segment of the market most apt for growth). Knowing that LVS is appropriately positioned to take full advantage of a Macau comeback, one must also consider our true Hedgeye Edge i.e. our Mass Tracker.
The Macau Government shut off the weekly and monthly data spigot – forcing most of the sell side and buy side into a guessing gaming as to where revenues may fall. Thankfully we don’t share that problem. Our Mass Tracker utilizes observational and other data that we have developed into a proprietary tracker which drives a 0.97 R-Square to Macau mass table revenues.
Heading into 2Q 2016, we anticipated Mass revenue growth of +2-4% YoY and the market bested our estimate by printing +4.6% YoY – a major surprise for the market and the true driver of stock gains this summer. Now looking to 3Q 2016 we see acceleration off this growth and project Mass revenues to be +4-6% YoY.
We know of very few stocks in consumer land which present a better risk/reward set up for 2H 2016.
INTERMEDIATE TERM (TREND)
Mass growth and the Parisian are two of the top intermediate term catalysts. Mass Tracker continues to suggest that the mass inflection is real which is a significant near-term catalyst for LVS. As the premier mass and base mass player in Macau, LVS is best positioned over the near and long term to capitalize on what should be a sustained period of mass growth that began in Q2 2016.
The Parisian opening on September 13th is a positive catalyst for base mass growth and cash flow. Unlike the premium mass focused Wynn Palace (and MGM Cotai), Parisian is directed at the base mass customer where there is more growth and less promotional pressure. Parisian should generate positive cash flow and mark the cessation of significant capital outlays.
LONG TERM (TAIL)
For the foreseeable future we choose to view the Macau recovery as volume driven. Lower hotel room rates, additional supply, and the inflow of more casino visitors are once again translating into casino revenue growth.
There’s undoubtedly a global hunt for yield at a reasonable price, and there are fewer examples where one does not have to pay up for yield. LVS presents a unique opportunity for investors. With low leverage (2x net debt/EBITDA) relative to its peer group (4x Net Debt/EBITDA), they could A) fund the dividend growth via increasing their leverage by 0.5x or even 1x and the dividend would explode (chart below) or B) they can continue to fund it via their growing FCF. Either way, we see dividend growth as sustainable and currently underappreciated.
ONE-YEAR TRAILING CHART
