Las Vegas Sands: A Buy As China Is Forced To Reevaluate The Country’s Zero Tolerance Policy – Seeking Alpha

ihsanyildizli/iStock Unreleased via Getty Images

Uncertainty almost always creates volatility in markets. When traders and investors don't have a clear picture of what a company's earnings will look like, usually even the slightest news story can move the company or sector the company is in significantly.

There is significant near-term uncertainty in the Chinese gambling sector in Macau right now, and no U.S. gambling operator is impacted more this near-term uncertainty than Las Vegas Sands (NYSE:LVS).

Las Vegas Sands is a $52 billion casino and gaming company that operates worldwide. The company usually generates nearly 60% of EBITDA from Macau, and much of the company's most impressive recent growth has come from Macau. Sands has often earned nearly 29% of its revenue from Singapore.

Las Vegas Sands is one of the best managed companies in the gambling industry and the company's various management teams have run the company well through various tough times over the years. Las Vegas Sands has dealt with money laundering investigations, the possibility of a trade war when Trump came in, and the recent Covid related issues. Each time the company has dealt with these the stock has sold in the range of $30-40 a share, which is where the current share price. Each sell-off has also been a buying opportunity, I don't think this time is any different.

Data by YCharts

Las Vegas Sands is high volatility stock that often sells off hard during times of uncertainty, and rallies hard when market conditions turn more positive.

The main challenge that Las Vegas Sands is facing right now is China's zero tolerance approach to Covid has effectively prevented Macau from being able to function normally, as traveling to Macau is very difficult for foreigner with China's current policies. Foreign visitors without exemptions are currently prohibited from traveling to Macau. There was a 14-day period of medical observation for foreigners travelling to Macau even before the most recent lockdown as well.

The gambling industry was also impacted by China's common prosperity agenda that emphasized curbing excesses of wealth, since the wealth gap in China, like most economies, became wider during the lockdowns. This policy was President Xi's focus on curbing economic and social inequality by cutting down on excess wealth, and obviously the Macau gambling scene, which caters to high rollers, is place where many elites go.

China also was and continues to be extremely strict about Covid going in the Olympics, and the world's second largest economy is still very strict about dealing with Covid cases even as Europe, the US, and much of the world, continues to open up.

Still, despite China's very strict zero tolerance policies, there are some important positive signs for the long-term outlook of China's gambling industry.

Six major licenses in Macau were recently extended for companies in Macau, including Las Vegas Sands. These companies will go through the formal application process for a longer-term renewal of their licenses next year. More importantly, there are increasing signs that China is repositioning away from their zero covid policy towards a more flexible approach.

The Wall Street Journal recently reported that China is looking for an approach that includes living with the virus. "In the near future, at an appropriate time, there will be a Chinese-style roadmap for living with the virus," noted Zeng Guang, China's former chief epidemiologist at the Chinese Center for Disease Prevention and Control. This article noted that China is looking at measures that include travel bubbles, mRNA vaccines, and better treatments for Covid.

Now that the Olympics are over and China's recent economic growth numbers came in at a very low 4.9% rate last quarter, as the country's massive stimulus that was enacted over the last several years comes to an end. China's economy grew at a 7.9% rate the previous quarter, and this data suggests that China will have to open up the economy to maintain normal high single digit economic growth.

Las Vegas Sands remains optimistic as well.

Rob Goldstein, the CEO of Las Vegas Sands, remained similarly optimistic over the company's long-term prospects in the region as well. He recently expressed strong optimism about Macau on the company's recent earnings calls as well. The Las Vegas Sands CEO said, "I think our activities, our investments speak for themselves. I have faith in the process. They've always treated us fairly, and we responded with the largest investment in any gaming market in the world. So, we believe we remain believers."

The stock is also not expensive looking at historical valuations, even though the company's earnings remain stressed. Las Vegas Sands has a very strong balance sheet, and the company has consistently been able to earn over $3 a share, with 2019 earnings coming in at $3.50 a share. This company has also been able to consistently grow earnings at a double-digit rate and maintain impressive margins of over 50%. At the current share price of $37 a share, this company trades at just over 10x pre-pandemic earnings.

China has been much stricter than any other G-8 country during the pandemic, and the recently flare up in the world's second largest economy highlights near-term risk. Still, China's economy is slowing dramatically, and the country will have to open up in the back half of the year if the Chinese government wants to maintain the kind of necessary economic growth required to sustain the country's standard of living. Well fear and volatility levels in the Chinese gambling sector are likely to remain elevated for some time, patient investors with a long-term outlook should be rewarded.

More:

Las Vegas Sands: A Buy As China Is Forced To Reevaluate The Country's Zero Tolerance Policy - Seeking Alpha