Sands Most Likely to Retain Macau License, Says Morgan Stanley

Posted on: October 26, 2022, 09:54h. 

Last updated on: October 26, 2022, 11:26h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Las Vegas Sands’ (NYSE: LVS) Sands China unit is the least likely of the six current Macau concessionaires to lose its license in the special administrative region’s (SAR) retendering scheme, according to Morgan Stanley analysts.

Sands China
Sands China’s Venetian Macau. The operator is the least likely to lose its license there. (Image: Bloomberg)

That’s a critical point for apprehensive investors, because the gaming industry was thrown for a loop when Genting Malaysia threw its hat in the ring to acquire a Macau casino permit. That means there are seven bidders for six licenses. Analysts and industry executives view Genting’s proposal as credible, and there is concern one of the six current concessionaires could be sent packing.

It appears Sands China is unlikely to be the displaced operator — if there is one. In a note to clients, Morgan Stanley analysts Praveen Choudhary and Gareth Leung said Sands China has made the right moves to retain its Macau license, including substantial non-gaming investments in the SAR.

Sands runs five integrated resorts there, making it the largest operator in the SAR. It’s the largest employer in the Chinese territory and spent an estimated $61 billion in Macau since 2007. That’s when accounting for taxes, payroll, and capital expenditures, according to Morgan Stanley.

Sands Stock Sports Attractive Valuation

Winning a 10-year gaming license in Macau — the term the SAR is offering to all concessionaires — would remove significant overhang from the Sands stock. Currently, the company runs six integrated resorts — five in Macau and Marina Bay Sands in Singapore.

As a result of that Macau footprint, Sands is vulnerable to license renewal risk, as well as China’s ongoing zero-COVID policy, which is hindering travel from the mainland to the casino center. Specific to shares of Las Vegas Sands, the benefit from the tumult is that the stock is attractively valued. Morgan Stanley prefers it to rival Galaxy.

Among large caps, Sands has a more attractive valuation than Galaxy,” wrote Choudhary and Leung. “Galaxy outperformed Sands during the pandemic, which we think was due to better balance sheet and lower credit risk. Once Sands’ gaming license is renewed and the industry starts making positive cash flow, we expect Sands to reverse this performance.”

In its efforts to procure another Macau license, Sands China has a vital card to play. It employs 26% of the gaming-related workforce in the SAR. Its next closest rival accounts for 20% of casino staffing. Sands’ staffing levels in Macau are more than US-based competitors Wynn Resorts and MGM Resorts International combined.

Gloomy Macau Outlook

Separate from its commentary on Sands, Morgan Stanley offered up a dismal outlook on Macau gross gaming revenue (GGR) for this year and for 2023. The bank slashed its forecasts for those years by 17% and 33%, respectively, citing ongoing travel protocols.

Speaking at the National People’s Congress earlier this month, Chinese President Xi Jinping signaled support for the country’s ongoing zero-COVID policy. The effects of that policy are palpable for Macau operators. Sands posted adjusted property EBITDA of -$152 million in the third quarter in the SAR.

“We continue to assume 2024 is the year the industry fully normalizes and keep our 2024e industry GGR unchanged at 80% of 2019 level,” added the analysts.