Casino operations at the Strip hold little value for Las Vegas Sands

Lower Baccarat volume has been the primary reason for this fall. In fact, Baccarat wagering is down 14%, while revenues from the game have declined 18% in the first 10 months of 2015. Lower Baccarat volume points towards a weaker Chinese market and its impact on tourist travel to the U.S. The Mainland China economy and government’s anti-corruption campaign is affecting Chinese high rollers even outside of Macau and this has impacted the Baccarat volume in the state. We don’t expect any significant change in the overall gaming environment in Las Vegas in the coming years as other states are also legalizing casinos and Macau has become more a popular gaming destination with gross revenues six times that of the Strip (as of 2014). Also, given the low contribution of this segment, any growth is unlikely to have a significant impact on the stock price, in our view.

We estimate that the Strip casino operations are of little value to Las Vegas Sands’ and contribute less than 5% to the company’s stock price. The company’s Las Vegas casino revenues have grown at an average annual rate of 7% since 2010, and the figure stood at $510 million in 2014. A significant portion of these revenues (around 65%) came from the table games while slot machines accounted for the rest. Within table games, baccarat continues to be the most popular game and accounts for close to 50% of table games revenues across the Las Vegas Strip. Given the concerns in China, baccarat volume has been lower even at the Strip. The baccarat drop at the Las Vegas Strip declined 18% in 2014 to $11.4 billion and it likely fall below $10 billion in 2015, according to our estimates.

Another reason for lower volume is the changing trends in the industry. Players now prefer to have some control over the game (unlike Baccarat) and they are inclining towards other skill-based games, including Poker. In addition, casinos are now including skill-based slots to their offering. While baccarat will continue to be a significant contributor to casino revenues, its overall share is likely to come down with the arrival of skill-based slots. However, the recent volume decline in Baccarat to some extent has been offset by growth in casino hold percentage, which grew from 11% in 2011 to 13.7% in 2014.

Overall, we don’t expect any significant growth in Sands’ casino revenues at the Strip and estimate the figure to be around $600 million and EBITDA of $150 million by 2020. Given the low value contribution of this segment, any growth is unlikely to have a significant impact on the company’s stock price. For Las Vegas Sands, Macau is the most valuable geography and accounts for close to 60% of its stock value while Singapore operations contribute 25%, according to our estimates. The impact of slower growth at Las Vegas will have a bigger impact on casino operators such as MGM Resorts , which derives around 70% of its value from the domestic operations.

The macroeconomic environment in the U.S. is also an important factor for the overall gaming demand. The U.S. per capita disposable income is expected to grow from $37,352 currently to $43,312 in 2020, according to a research by IBISWorld. As the U.S. economy grows and per capita disposable income increases, consumer spending on leisure, including gaming and entertainment, will also rise. This will aid the overall casino demand.