Morningstar | Sands China FVE Unchanged After 3Q Results
We maintain our fair value estimate for narrow-moat Sands China at HKD 42 per share after the release of third-quarter results. We think Sands China is now trading at an attractive discount for long-term investors. Our fair value estimate has already incorporated the impact of an economic downturn in the next few years. It is also based on the assumption that Sands China will be able to renew its license, albeit at a higher gaming tax rate. We believe the company is on track to meet our 2018 earnings estimate.We expect to see weaker premium mass and VIP revenue, given weaker consumer sentiment over the escalating trade war between China and the United States and the weakening Chinese economy. We saw a 7% sequential decline in premium mass average win per table per day to USD 616 in the third quarter. VIP revenue rose 15% year over year in the quarter, as Sands China is expanding its VIP capacity. We are concerned that Sands China is expanding the most cyclical segment amid a weakening economy, which will put pressure on profits in the near term. Although its VIP business comes from a low base, we don’t think Sands China can be immune from an overall weakening macro environment and continue to post growth throughout a downturn. Nevertheless, we share management’s bullish views on Macau’s gaming market in the long run and believe the investment will eventually pay off. Interestingly, base mass average win per table per day increased 7% sequentially in the quarter. Management attributed it to having the right strategy such as sufficient room and retail capacity in the base mass segment.
Another highlight is that Sands China is upping its investment in The Londoner. The capital expenditure is USD 1,350 million from 2019 to 2021, compared with USD 700 million from 2018 to 2020. We believe that the investment speaks to the company’s belief in the long-term potential of Macau. It can increase Macau’s attractiveness as a travelling destination and can increase its chance of license renewal. We also think it will help maintain Sands China’s leading position in Macau as rival Galaxy opens phases 3 and 4.
Sands China’s year-over-year hold-normalized adjusted property EBITDA growth slightly decelerated to 18% in the third quarter from 22% in the second quarter. Adjusted property EBITDA margin declined 20 basis points on a sequential basis to 35.0%, and we think Sands China is on track to meet our 35.2% margin forecast for the full year.
Sands China and its subsidiaries are principally engaged in the operation of casino games of chance or games of other forms, the development and operation of integrated resorts which contain not only gaming areas but also meeting space, convention and exhibition halls, retail and dining areas and entertainment venues and other ancillary services including ferry operations and other related operations in the Macao Special Administrative Region of the People's Republic of China.
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