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Morningstar | Sands China’s 2Q Earnings Continue to Be Driven by Robust VIP and Mass Growth; Shares Fairly Valued. See Updated Analyst Note from 26 Jul 2018

Narrow-moat Sands China’s, or SCL’s, second-quarter update does little to alter our view, and we retain our fair value estimate of HKD 42. Adjusted property EBITDA grew 25% year over year to USD 750 million on the back of strong growth in both VIP and mass gaming segments. Meanwhile, hold-adjusted EBITDA margin rose 170 basis points year over year to 35.2% for the quarter. That said, we believe the strong results have been mostly priced in, and we still view shares as fairly valued.

We expect the higher-margin and more sustainable mass gaming will remain the key earnings driver for SCL. Total mass drop and win in the second quarter grew 19% and 20% year over year, respectively. In particular, premium mass revenue grew 29% and base mass revenue rose 12% from the year-ago period. The acceleration in mass market growth started in the fourth quarter last year, and management believes the solid growth was largely attributable to the growing visitation of customers from non-Guangdong provinces in China (up 17% for the trailing 12 months), who tend to spend more and stay longer in Macau. In addition to its bread-and-butter mass gaming, SCL also recorded strong growth in VIP win, which grew 30% year over year on the back of additional amenities across its property portfolio and improved offerings to customers.

Following its comprehensive suite renovation program, SCL’s flagship Venetian Macao reported robust performance, with 44% and 32% mass and VIP volume lift (above industry growth of 21% and 13%, respectively), and adjusted property EBITDA rose 29% year over year in the second quarter. This growth was also ahead of the respective 20% and 30% mass and VIP lift seen across its other portfolio of Macau resorts.

Management intends to emulate the success of The Venetian Macao and will use that as the blueprint for capital expenditure for other Macau properties over the next few years, starting with its Parisian casino, which has already seen a 4 times return on initial suites constructed relative to old rooms.

We think reinvestment will be a key theme for SCL’s future growth. The conversion of premium suites in Parisian is expected to be completed by year-end 2018, while the expansion and refurbishment of VIP gaming areas in Venetian Macao and Plaza Macao will be completed throughout 2018-19. In addition, new luxury suites will be available in St. Regis Macao Tower and the tower adjacent to Four Seasons Macau by late 2019. Meanwhile, SCL’s third European-themed resort, The Londoner, will commence construction in late 2018, with all components expected to be ready in 2020. These investments, along with SCL's leading location, mass, and room share position, support our view for ongoing share gains in the Macau gaming market.