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Morningstar | Maintaining Sands China FVE at HKD 45; Weak Share Price Good Entry Point for Long-Term Investors

We are making no change to our HKD 45 fair value estimate for narrow-moat Sands China. Although fourth-quarter revenue and adjusted EBITDA were better than our expectation, we expect earnings to deteriorate as a result of a slowing economy in China. On a U.S. GAAP basis, Sands China’s hold-normalized adjusted property EBITDA margin was 34.8% in the fourth quarter versus 35.0% in the third quarter and 36.0% in the fourth quarter last year. The weaker margin this quarter was due to higher-margin VIP direct business having an unlucky quarter while lower-margin junket VIP business had a lucky quarter, leading to a mix shift toward the lower-margin business. Year-over-year revenue growth in the quarter was 10% compared with 13% in the third quarter. Sequentially, net revenue was up 5%. Net income was down 11% year over year; we will not have clarity on the reasons for the decline until Sands China publishes its full results.

Average base mass win per table per day for the group was resilient, improving 3% sequentially to $725 million while average tables employed was flattish. Average premium mass win per table per day was a quarterly record $693 million, rising 13% sequentially. The average VIP table increased 20% sequentially as management decides to reinvest and gain VIP market share. This propelled the average VIP win per table per day by 35% to $692 sequentially. The fourth quarter includes the Golden Week holiday and traditionally has less contribution from the base mass than the third quarter, which includes the summer holiday. As such, the performance of the higher-end segment is stronger sequentially. We think a weaker macro environment and damped sentiment will take time to filter through gaming demand and earnings; we expect to see lower mass and VIP win per table per day in the coming quarters of 2019.

Management said the new St. Regis tower suites, under construction now, will have direct access to the Dragon’s Palace casino floor and open around Chinese New Year in 2020. The Sands Cotai Central’s rebranding into the Londoner will commence around March or April this year and is expected to open in the first half of 2020. Holiday Inn will be closed after Chinese New Year this year and reopen in late 2020 while Conrad, Sheraton, and the existing St. Regis will remain intact. The Four Seasons tower suites will open in the fall of 2020. The gaming floor will still be open for business. We think most of the disruption will occur this year, which will add another layer of weakness to Sands China's earnings in 2019, in addition to the weaker market. However, in the long term, we do not doubt that the Londoner will deliver better performance than Sands Cotai Central and expect it will be key to maintaining market share against the opening of Galaxy phases 3 and 4.