Betting on China’s Middle Class

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My wife insists we are going to Vegas for my “Dirty Thirty” next year.

Even though we visited Vegas several years ago, we never made it outside of the city to view the Grand Canyon or Hoover Dam. Instead, we spent the entire week touring the different casinos and attractions the strip has to offer.

We were there for about week, and I think we spent only a few hundred dollars in the casinos — but we lost every penny.

I know, I know … the house always wins.

But if you take a look at the casino sector now, you would think the house has been having a little trouble considering the way the shares have fallen off — and therein lies our investment opportunity…

Since early last year, casino stocks have drifted lower, largely tied to China’s Macau operations — which have seen tourist and gambling revenues plunge following stricter regulations. But this steep sell-off presents a great investment opportunity in one casino stock.

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A key characteristic I look for in a possible investment opportunity is dividend payments. It’s a tangible form of earnings that the company hands back to shareholders.

While casino stocks such as Wynn Resorts, which cut its dividend, and MGM Resorts International, which doesn’t pay a dividend, are fetching higher earnings multiples than a stock that boosted its dividend by 30% this year, I’ll take the latter every day.

That’s why the casino stock to own is Las Vegas Sands (NYSE: LVS) — operator of several major hotels and casinos around the world. Most notable to us is likely the one in the states — the Venetian, which has been in Las Vegas since 1999. But for the company, that hotel is just a fraction of its overall operations.

Tapping Into China’s Growing Middle Class

What started out solely as a U.S. company now receives just 13% of revenues from within our borders. Today, the bulk of its revenues flow from China and Singapore, which brings us to the current struggles for the casino operator.

Gaming revenues in China’s city of Macau dropped off dramatically this year, falling by roughly 30% in May as China cracks down on tourism to the city. As a result, Las Vegas Sands shares have plummeted more than 30% over the past year.

The investment opportunity is in the fact that this downside to Macau is going to be short-lived.

China is one of the most prosperous nations in the world. Its middle class alone is greater than the entire U.S. population, and it’s growing rapidly — expected to top 600 million by 2022, up from roughly 300 million today.

As regulations lighten up, and more Chinese flock to Macau for their chance of hitting it big, the casinos in that region will once again thrive — boosting the shares of Las Vegas Sands in the process.

But this trade isn’t just about a rebound; it’s also locking in a significant yield.

Oversold and Underloved

Las Vegas Sands currently dishes out a 5% yield, more than double its average yield of 2.5% paid last year.  The company has increased its dividend by more than 30% in each of the past three years — that’s a great sign of the company’s confidence in continued growth.

Las Vegas Sands also announced an aggressive buyback program last year, which is just another form of boosting shareholder wealth.

Both of these financial developments depict a company committed to growing shareholder value, which is exactly what we want.

After the recent sell-off, the shares now trade at just 16 times earnings — down from more than 30 early last year. The company has generated three-year average revenue and income growth of 10% and 13%, respectively.

While times are tough at the moment, the stock’s price is factoring in these troubles.

Earnings for this year are already projected to fall 25%, yet the security has fallen more than 30%. Once Macau shows a signs of a return to revenue growth, the shares of Las Vegas Sands will rebound quickly.

A return to the highs of just last year would hand us a nice 70% gain — but shares are poised to soar past that in coming years.

Regards,
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Chad Shoop
Editor, Pure Income