Las Vegas Sands, Wynn IPOs seen as sure wins

HONG KONG/LOS ANGELES Wed Aug 5, 2009 11:17pm EDT

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HONG KONG/LOS ANGELES (Reuters) - With Las Vegas struggling, investors keen to place bets on casino companies will plunk their money down on U.S. casino archrivals Las Vegas Sands (LVS.N) and Wynn Resorts (WYNN.O) IPOs in Hong Kong for a stake in Macau, the world's biggest gambling market.

Their initial public offerings appeal on several levels. They will be among only a handful of "pure plays" in the lucrative Macau gaming sector, the others are Melco Crown Entertainment (MPEL.O), Galaxy Entertainment Group (0027.HK) and SJM Holdings (0880.HK).

That gives investors a chance to confine their exposure to Macau, unburdened by both companies' struggling Las Vegas operations. Gaming companies in Las Vegas are fighting uphill battles amid the economic downturn and a glut of new casinos.

Analysts say the offerings will also be regarded as proxy plays on China, the world's best-performing major economy.

Sands, the world's most-valuable casino company, could tap the Hong Kong IPO market as early as this month, hoping to raise up to $3 billion for some of its Macau assets.

Wynn, the world's No.2, is following suit, planning to raise up to $1 billion by the fourth quarter.

Of the two, Wynn's offering is a better bet compared with debt-heavy Sands, due to Wynn's lower debt levels, good track record and minimal project commitments, analysts said.

"Wynn has a very premium brand name, it might be more favorably received," said Sanford Bernstein analyst Janet Brashear. "If the IPO goes first and it's successful, then it will benefit Las Vegas Sands too."

The IPOs are coming to market at a time when Hong Kong's stocks are rallying and analysts forecasting the former Portuguese colony of Macau will recover faster than Las Vegas.

After dropping 21 percent in the first three months of the year, Hong Kong's benchmark Hang Seng Index .HSI has risen about 81 percent since its lows in March, making IPOs a more attractive proposition.

Macau's ace in hole is China, a mere day trip away. The world's biggest gambling market draws a daily flood of risk-loving Chinese as they head to the only place in China where casinos are legal.

"Chinese people love to gamble and they have more money every day," said Susquehanna Financial analyst Robert LaFleur.

Macau's gross gaming revenues are set to rise 11 percent year-on-year in the fourth quarter, according to BNP Paribas.

WYNN WIN ?

Most analysts are putting their money on Wynn.

"The Wynn IPO is a war-chest maneuver. They're very opportunistic about raising money when money is available," said Sanford Bernstein analyst Janet Brashear."

The ratio of net debt to EBITDA for Wynn is estimated to be 4.6 times, much lower than Sands at 10.8 times, by the end of 2009, according to a report by JP Morgan.

Sands, which operates the Palazzo and Venetian resorts on the Vegas Strip, has come close to violating loan agreements and has suspended work on several projects and laid off hundreds of workers. The company operates two casinos in Macau, including the Venetian, the world's largest casino resort.

It will open a gambling resort, billed as the world's most expensive casino resort, in the city-state of Singapore next year.

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The companies have different strategies.

Sands, owned by billionaire Sheldon Adelson, draws a mostly mass-market crowd. This brings high margins because "junkets," which bankroll VIP gamblers, cut out about 40 percent of a casino's profits in commissions, Brashear said.

With its plush carpets and chandeliers, Wynn's Macau casino has managed to attract direct VIP customers without the use of junkets because of its reputation, according to analysts.

PRICEY BETS?

Exposure to the world's hottest gambling market will not come cheaply for investors.

Brashear estimated that the IPOs could be priced at 10 to 12 times enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA), higher than the multiples of 6 to 8 for the companies' U.S. shares.

Macau's inflated property market is one reason for the difference. "The Asian investor pays up significantly for real estate," said T. Rowe Price portfolio manager Joseph Fath.

Analysts warned increasing competition in Macau means a return to explosive growth rates seen earlier this decade is unlikely, with three more new casinos expected to open within the next two years.

The weak global economy, further competition from Singapore and concerns Beijing will clamp down harder on Chinese tourist visits into Macau could also make the IPOs risky investments.

And as one analyst pointed out, a bet on these two casino listings could prove to be, well, a bit of a gamble.

"The valuations of their assets could vary at any point in time," said Moody's analyst Kaven Tsang. "We maintain a negative outlook for the sector. The overall economy and gaming revenues are not showing a significant rebound yet."

(Editing by Don Durfee, Chris Lewis and Valerie Lee)

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