3 Reasons Las Vegas Sands' Stock Could Rise

There's a lot of concern about gaming stocks like Las Vegas Sands (LVS -0.37%) right now. Macau's gaming revenue has fallen for four straight months and there's general concern about the Chinese economy, so investors have fled the stock, which is down 19.2% so far this year.

It's impossible to tell exactly what a stock will do in the future, but for Las Vegas Sands there are still reasons to be bullish. Despite the risks, here are the three reasons I think Las Vegas Sands stock could rise.

Mass market players are still going strong
You can see from the chart below that gaming has taken a major hit over the last few months in Macau.

Source: Macau Gaming Inspection and Coordination Bureau.

But that doesn't tell the whole story of Macau, particularly for Las Vegas Sands. Most of the decline in gaming has come in the VIP baccarat market, where junkets bring in high rollers and give them credit to gamble at casinos. The casino then offers perks and payments to junkets based on how much gamblers lose. These players have been hardest hit by the corruption crackdown in Macau.

But mass market baccarat -- which is the second largest revenue generator in Macau casinos -- has held fairly steady so far in 2014. You can see below the revenue figures for VIP and mass market baccarat so far this year and the trends we're seeing in both.

Source: Macau Gaming Inspection and Coordination Bureau.

This is important because mass market players are about four times more profitable for a casino than VIP players. You don't have the same junket and comp expenses and there's also little to no credit risk. So, revenue may be down big in Macau, but profits aren't down as much because the mass market is holding on and that's where Las Vegas Sands generates most of its profits.

Marina Bay Sands is being used to sell other countries on Las Vegas Sands' integrated resort capabilities. Image source: Las Vegas Sands.

Singapore is a jewel of Asia
Macau drives the majority of Las Vegas Sands revenue, but Marina Bay Sands may be its most important resort it owns. Since the $4.7 billion resort's grand opening in 2011 it has generated $5.5 billion in EBITDA -- a proxy for cash flow from the resort -- and become an icon CEO Sheldon Adelson can use to showcase his company's ability for new gaming licenses that open up around the world.

What makes Marina Bay Sands the most important resort for Las Vegas Sands financially is the fact that the company owns 100% of the resort. An IPO of Sands China Ltd. sold nearly 30% of the shares in Las Vegas Sands' Macau operations, but Singapore has been kept for investors.

Three growth opportunities in waiting
The days of Macau growing 50% or more per year are likely over, but there are still some growth opportunities on the table for Las Vegas Sands. The Parisian is due to open early next year and based on its size and location should add $500 million to $1 billion in EBITDA when its fully operational. But the big opportunities are elsewhere in Asia.

Rendering of The Parisian in Macau. Image source: Las Vegas Sands.

South Korea is looking to attract foreign investment in an integrated resort and Sheldon Adelson is in talks with government officials about what may be available in a bid there. South Korea already has 17 casinos but 16 are only open to foreigners, resulting in a modest $2.7 billion gaming market compared to $6.4 billion in Singapore and $47.1 billion in the last twelve months in Macau. A megaresort could help grow the country's gaming market.  

But Japan is the big prize that gaming companies are fighting over even before casinos are allowed. Analysts at CLSA Ltd. estimate that Japan could be a $40 billion gaming market by 2025 and it's likely that only a small number of players would be allowed to build there. The cost of building a mega resort in Japan could be upwards of $5 billion, but with that kind of potential Las Vegas Sands and others will put everything they have into winning a bid.

A lot to like with Las Vegas Sands
Despite the risk of a protracted downturn in Macau, I think the upside potential of Las Vegas Sands is too good to ignore. The mass market in Macau continues to grow profitably, Marina Bay Sands is a profit machine, and growth opportunities could add billions more in annual earnings.