Sands China IPO – A Watershed?

Posted: November 23, 2009 in Uncategorized

Will Sands China Get It Right This Time?

Reviewed by: Professional Ground Panelists 

23rd Nov 2009    

Sands China (Macau assets) was finally listed on the Hong Kong Stock Exchange. The public offers gathered for Sands a total of HK$19b (or USD2.5b), fall short of Adelson’s unrealistic appetite of USD3.5b. But if Mr. Adelson has the foresight, he would have listed his Macau assets in 2006. In fact, with the Hong Kong IPO pricing of HK$10.38 it is still considered to be full of downside risks. The luke warm response for its Hong Kong IPO subscription is a clear statement of investors’ lower risk appetite. 

It is expected that Sands China shares will be on a downward trend for a long period of gestation, until its Macau EBITDA is further improved with continued cost cutting measure (just how far can it go?), showing good operating margins in the next many quarters and a stronger balance sheet. And this scenario may not be easily materialized.

Sands China’s Business Model

Regardless of the marketing propaganda, Sands China’s business model of expanding into Plot 5 & 6 for greater market share is not that sound after all. Appended below are some of the obvious factors we observed: –

–  Casino assets (including hotels, residential property) in Asian context don’t really command the premium unless the casino license can be easily transacted. And Sands concessionary cannot be further split for sales like Wynn did. Therefore, proposition of sales of shopping malls and hotel properties in Macau will not fetch any premium. This, has been proven the case before Sands tried for IPO in Hong Kong.

– In the case of Macau, as everyone now realized that the Beijing central government has the prerogative of turning the supply (of players) tap on and off as they wish. Demands generally do not increase because the casino operators increase the supply of gaming devices and new properties.

– Macau casino industry has already in the over-supply mode. With Plot 5 & 6 resume its construction to be rolled out to over-crowded market, we don’t see how this business model of increase in supply of exactly the same products (more hotel rooms and gaming tables) will benefit Sands China as well as strengthen its EBITDA margins. –

– Product and table pricing will be driven further down all the way with Plot 5 & 6 properties coming into the market. Especially so for the mass market segment. VIP/high-roller business segment also depends on flow of credit and central government policy rather than more supply of such similar products. That is precisely the reason why Galaxy Entertainment Group has been holding their horses on its mega resort in Cotai. Or just look at how City of Dreams performs under such circumstances, with USD390m per quarter mass gaming revenue and an average of 3.3% win (2nd highest in Macau after Wynn) for its VIP gaming business.  Sands China’s plot 5 & 6 have to achieve quite convincing EBITDA and margins for the group in order to be viable at all.  Without taking a larger market share in mass gaming (for greater margins) in Macau, the downside risk of continued investment for plot 5 & 6 is high.

– As we envisage, Plot 5 & 6 can be more a liability on Sands balance sheet rather than a strong business driver. In essence, Sands China has to continue to innovate in order to be viable in this crowded market. Costly expansion on similar product lines in the Asian context won’t work for Sands, it is not the same equation as Las Vegas Strip. Pricing has to be affected across the board.

It is time for Sands to re-examine its original vision of creating the Asia’s Las Vegas in Macau landscape as they saw it the way in 2002. There were drastic changes in the casino-resort investment scene since 2007/8, in terms of lack of credit lines regardless of low interest rate environment. What can make it worse for Macau is whether the over-dependent on junket VIP turnover (with low margins) is sustainable into the future.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s