Singapore is arguably the most valuable gaming market in the world, and Las Vegas Sands (NYSE:LVS) owns one of just two gaming licenses there. In 2018 the resort generated $1.7 billion of property EBITDA, a proxy for cash flow. That's an amazing figure, even for the most expensive resort ever built at $8 billion.
In early April, Las Vegas Sands and Resorts World Sentosa were granted continued exclusivity of their gaming licenses through 2030, an extension from an original expiration in 2017. The exclusivity is a huge win for both companies, but investors should know that it comes at a cost.
Taking a bite out of earnings
When the exclusivity was announced, Las Vegas Sands also announced that it will be paying a higher tax rate on gross gaming revenue starting on March 1, 2022. The date of the tax increase will correspond closely with the opening of a $3.3 billion expansion of Marina Bay Sands.
Below is a look at the tax rates on gaming revenue at Marina Bay Sands before and after the increase.
|Before March 1, 2022||15%||5%|
|After March 1, 2022||
18% under S$3.1 billion
22% over S$3.1 billion
8% under S$2.4 billion
12% over S$2.4 billion
The impact of taxes is easy to see. Just to maintain net after-tax revenue, Marina Bay Sands will have to grow mass market revenue by at least 3.7% and as much as 9%. On the premium side, gaming volume growth would need to be at least 3.3% and up to 8%.
The growth I outlined doesn't include any necessary return from the $3.3 billion being invested into the next expansion of the resort.
The price of admission
When the gaming license extension was announced, it came with the requirement of new investment in a hotel tower, convention space, and an arena, and very little in new gaming space. But Las Vegas Sands agreed to those terms for its Marina Bay Sands expansion because the property is so valuable for the company.
The good news is that the extension of gaming exclusivity lasts at least another 11 years. Over that time, the company may generate around $20 billion of EBITDA, more than enough to justify the investment and continue generating cash flow for investors.
What to watch
Both the new investment and the higher tax rate will make it harder to make money on Marina Bay Sands. Investors will want to watch hotel rates now that supply is being added, along with gaming volume, both in the mass market and premium play. If the new hotel tower can attract customers and offset the increase in taxes, it could be a nice incremental growth driver for Las Vegas Sands.
On the other hand, if the new tower dilutes Marina Bay Sands, we may see revenue and EBITDA flatten at the resort. That would be bad for Las Vegas Sands, especially when you consider the $3.3 billion investment going into the resort. This isn't a slam dunk expansion plan, and it comes at a high cost for Las Vegas Sands.