The potential oversaturation of the premium gaming market represents a real long-term credit risk for Asian casino operators, but Las Vegas Sands (LVS) remains better positioned than any other to push through the pain, according to analysts.
In a report released on Monday titled “New APAC Casinos Will Create Global Gaming Winners and Losers”, Fitch Ratings cited the many billions of dollars invested in casino resorts over the past decade aimed at wealthy Chinese consumers in APAC, warning that while such heavy investment continues to this day, the premium segment has already plateaued in markets such as Singapore and Australia.
“Investment is continuing across the region, even as China’s economy goes through a structural slowdown,” the report said. “Fitch forecasts China’s GDP will grow 6.1% in 2019 and 2020, down from 6.8% in 2018.”
Fitch pointed to three premium markets in particular as facing potential headwinds in the coming years due to their reliance on Chinese visitation, including South Korea, Australia and Singapore.
“We view these developments as somewhat risky because foreigners-only projects in South Korea have experienced subpar return on investment and VIP or rolling chip revenue in Australia declined meaningfully since peaking around 2015-2016,” it said.
“Japan, South Korea and Singapore law limits gambling by locals either through entrance fees or quotas and limiting locations, which increases the emphasis on foreigner visitation. However, in the latter two markets, premium segment VIP or rolling chip revenue slowed due to the macroeconomic drivers in China and increased regional competition.”
The outlook is much better, however, for operators with mass market exposure and none is better positioned in that regard than LVS, despite some recent struggles for its Singapore IR Marina Bay Sands.
“The mass market segment in Macau is less cyclical, more profitable and benefits from secular tailwinds related to the rising middle class and improved transportation infrastructure in the greater China area,” the report read.
“LVS’s 2018 market share in mass market table game revenue in Macau was 31% and the mass market comprises nearly 70% of LVS’s gross gaming revenue relative to about 50% for its Macau peers.
“LVS is geographically diversified with a duopolistic position in Singapore, has a strong mass-market oriented development pipeline in Singapore and Macau, and is a strong contender for an IR in Japan.”
Brokerage Sanford C Bernstein offered a similar sentiment on Monday in a note about LVS titled “5 Big Reasons to Own the Stocks.”
Analysts Vitaly Umansky, Eunice Lee and Kelsey Zhu described LVS properties as the “crown jewels of global gaming”, adding the company and its Macau subsidiary Sands China “dwarf their competitors in terms of GGR market share in key respective markets in which they compete.”
Bernstein said Sands will continue to be the largest operator in Macau over the next five years, while the current upgrading of properties should sustain near-term growth. Likewise, Marina Bay Sands is about to embark on a welcome US$3.3 billion expansion that will add meaningful capacity and LVS also has Japan on the horizon.
The Japan IR opportunity “provides an attractive long-term optionality for LVS shareholders,” the analysts said. “The Japan market will likely surpass the size of Singapore and LVS is well positioned as a front-runner in the race for an integrated resort development. Such an investment could be worth (on a PV basis) US$4 per share today for a property that would open in 2025.”
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