Las Vegas Sands: Macau 'Redemption Right' Raises Long Term Concerns
Posted on Jun 11th, 2007 with stocks: LVS
Zachary Scheidt submits: "Beep beep beep, Crash bang pound, cha-Ching!!" There is a lot of noise surrounding Las Vegas Sands (LVS) as they ramp up building projects in Macau, Cotai, Las Vegas, Singapore, the UK and possibly a few more that I have left out. Their financial statements also have more than their share of noise and take an extra cup of coffee or two to get through. It was well worth the extra joe, however, as I found some nuggets that haven't been explained by any of the analysts I have read so far.
The biggest concern that I found was the fact that although the company is sinking billions of dollars (that's with a "B"!) into developing the Sands Macau, a few years down the road the company may not have anything to show for it. On page 35 of the annual report for 2006, the company mentions almost in passing that in 2022 the Macau government may exercise its redemption right. According to the company: "Unless our subconcession is extended, on that date, all of our casino operations and related equipment in Macao will be automatically transferred to the Macao government without compensation to us..." It gets worse. If the government so chooses, in 2017 the government may exercise their redemption right by paying LVS "fair compensation or indemnity."
I was talking with another fund manager who was very excited about LVS prospects. Much like Jordan Kahn, this gentleman was bullish on LVS and excited about the strength in the overall sector. When I mentioned the property issue, his remark was, "that's in 10 years - I don't care what happens 10 years from now." But any investor SHOULD care what happens 10 years from now because the market prices that in!
From a valuation standpoint, LVS is trading at 80 versus consensus earnings of 1.43 this year. Let's say the company beats and hits $1.50. That's still a 53x multiple! "OK Zach but think about future growth." The estimate for 2008, after most of the new casinos open, is $2.74. That's STILL a 30x multiple over 2 years out! So if the stock grows 12% a year (which would be a big disappointment to the bulls) it will be just over $100 at that point; it will trade at 36 times current earnings and the bulls will still be looking to growth to justify this high multiple. But wait - now the mountain ahead is getting closer - will Macau exercise this right? How do you discount that possibility? What about the $2.5 Billion it took to build the resort? These are questions that are relevant TODAY because they factor into the long-term discounted cash flows of the company.
Now, I know that Sheldon Adelson is no dummy. He's probably got me 10x on smarts and a few more times than that on net worth (he owns 184 million shares - you do the math) but I think there are some concerns that have not yet been brought to the surface. This is an incredibly debt intensive operation. The company owes over $4 billion and will add another $2.5 billion to that. They are at the mercy of the Chinese government on some of their key products and I'm anxious to see what happens to the "former" socialist country when the Olympic spotlight is through shining. Interest rates and liquidity are at very favorable levels now but that tide may be changing. And if the consumer begins to have less gambling money, this could backfire quickly.
As always, I'm staying diversified and not putting too many eggs in this one basket, but I am anticipating a further decline and waiting patiently to see what happens between 2017 and 2022. |
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