|Shares Out. (in M):||790||P/E||19.2x||19.5x|
|Market Cap (in $M):||57,500||P/FCF||0||0|
|Net Debt (in $M):||7,000||EBIT||4,000||4,175|
|Borrow Cost:||General Collateral|
This is a relatively simple thesis that I view as highly asymmetric due to the strong variant perception embedded in the idea relative to consensus.
The idea is to short Las Vegas Sands (LVS) on the non-consensus view that it could suffer significant unanticipated collateral damage due to the political chess match going on between China and the current US administration.
This risk is largely absent from any discussion amongst sell-side or buy-side investors who understandably focus all their research on the fundamentals of the Macau gaming market. The stock has remained strong (+25% y/y, +7% YTD). I have no differentiated view on the fundamentals of Macau, which continues to rebound from the 2015 deceleration that was induced by anti-corruption measure of the Chinese government. I will focus the discussion instead on the risks that LVS faces in its upcoming concession renewals.
Background: LVS is one of the largest global casino companies, with operations in Macau (54% of 2017 EBITDA), Singapore (34% of 2017 EBITDA), and the US (12% of 2017 EBITDA, focused in the Las Vegas strip). By most measures, ~2/3 or more of the value of the company resides in its Macau casino concession which was awarded in 2002 under a 20-year arranagement. This concession expires in June 2022, along with a host of the original Macau concessions (3 concessions awarded to SJM, Wynn, and Galaxy; and 3 subconcessions awarded to MGM under SJM, Melco under Wynn, and Las Vegas Sands under Galaxy) that expire between 2020-2022.
To date, there has been no clarity given by the Chinese government as to what will happen with these concessions, whether they will be renewed, and under what terms (tax, government take, etc). Management teams of the casino companies have exuded significant confidence that the renews will be a non-event and concessions will be extended.
However, when you look at the terms of these concessions, it becomes clear that the Chinese government holds all the cards in the outcome here.
It is worth reading the LVS 10-K to fully appreciate the long list of permutations that the government could use to hurt the US casino operators (i.e. ability to unilaterally revoke licenses with no compoensation for broad/vague language around "suitability" of individuals involved or any participation in illegal activity which is comical given that the Chinese casino industry is widely known to be a key conduit for money laundering out of the mainland). However, even adhering to the strict terms of the concessions, LVS could easily be impaired very simply by China deciding not to renew and this is entirely within their legal right to do so. Here is the language from their 10-K:
"Our subconcession agreement expires on June 26, 2022. Unless our subconcession is extended, all of VML's casino premises and gaming-related equipment will be transferred automatically to the Macao government on that date without compensation to us and we will cease to generate gaming revenues from these operations. Beginning on December 26, 2017, the Macao government may redeem the subconcession agreement by providing us at least one-year prior notice. In the event the Macao government exercises this redemption right, we are entitled to fair compensation or indemnity. The amount of this compensation or indemnity will be determined based on the amount of gaming and non-gaming revenue generated by The Venetian Macao during the tax year prior to the redemption multiplied by the number of remaining years before expiration of the subconcession. We cannot assure you that we will be able to renew or extend our subconcession agreement on terms favorable to us or at all. We also cannot assure you that if our subconcession is redeemed, the compensation paid will be adequate to compensate us for the loss of future revenues."
Also consider other sources of leverage that the Chinese government has against LVS, again also within their legal right (quote from their 10-K):
"We have had the benefit of a corporate tax exemption in Macao, which exempts us from paying the 12% corporate income tax on profits generated by the operation of casino games. This exemption does not apply to our non-gaming activities. We will continue to benefit from this tax exemption through the end of 2018. In December 2017, VML requested an additional income tax exemption for either an additional 5-year period or through June 26, 2022, the date our subconcession agreement expires. Additionally, we entered into an agreement with the Macao government in May 2014, effective through the end of 2018 that provides for an annual payment that is a substitution for a 12% tax otherwise due from VML shareholders on dividend distributions paid from VML gaming profits. We intend to request an additional agreement with the Macao government to correspond to the income tax exemption for gaming operations; however, there is no certainty that either of these tax arrangements will be extended beyond their expiration dates. If the arrangements are not extended, a 12% tax would be due on either earnings or distributions from earnings generated after 2018, which could have a material adverse effect on our financial condition, results of operations and cash flows."
Why would the Chinese government want consider not extending the concessions and run the risk of knock-off dampening effect on Chinese foreign-direct investment, both in Macau and possibly other industries? I think the answer lies in maximizing its leverage with the US given the chess match underway between the two countries. China has very few options to hurt the US, a fact well-known to the Trump administration and why they are playing this so aggressively. They import only $125b of stuff from us (mostly food) and we buy $550b of stuff from them (manufactured goods, etc). There are really no US industries that have been allowed to win in China with one glaring exception: the US casino companies. All of our tech companies (Google, Facebook, etc) have been kicked out and their business models replicated by national champions (Tencent, Baba, etc). Our financial services companies (banks, credit card networks like Visa/Mastercard) were never allowed to compete and now the payments market has been taken by the locals). The only US companies that I can point to that have been allowed to fairly compete and win in China has been the casino companies. Yet these concessions all expire in 2-4 years and the market remains highly complacent about the renewal risks.
Further, consider some of the personal politics: Sheldon Adelson, the founder of LVS who controls it with his 400mm share, ~$30b personal stake, was the single largest fundraiser for Donald Trump in the 2016 election and the two are very close. If you wanted to pressure Trump to be reasonable, there would be no easier way to do it than sabre-rattling around the concession renewal. Given this concession represents call it 2/3 of its net worth, he would likely personally appeal to the administration to reach a reasonable settlement.
My simple thesis here is that this risk is real and really not priced in at all in Las Vegas Sands, which is trading toward the higher-end of its historical EV/EBITDA multiple. If you read sell-side notes, there really is little to no mention of concession renewal risk and almost zero mention that that renewal risk could become entertwined in the current escalating trade war. This creates significant asymmetry.
One additional thought is to be short LVS and long the Chinese local casino companies (SJM, Galaxy). They could be big winners if the concessions are not extended given they may have the opportunity to take over the assets at a highly-favorable price.
Concession renewals and beginning negotiations