Are the Best Days of Sands China Ltd Over?

Listed in 2009, Sands China Ltd (HKEX: 1928) is a leading developer, owner, and operator of integrated resorts and casinos in Macao. Today, it is a holder of 1 of the 6 concessions or sub-concessions allowed by the Macao government to run casinos and gaming areas in Macao. As of 8 April 2019, Sands China Ltd is worth HK$ 339.3 billion in market capitalisation, approximately 6 – 7 times bigger than Genting Bhd and is 1 of the 50 constituents of the Hang Seng Index presently.

In this article, I’ll highlight on its fundamentals, bring you an update on its latest financial results and valuation figures according to its current stock price of HK$ 42.00 per share. Thus, here are 12 things to know about Sands China Ltd before you invest.

Property Portfolio

Sands China Ltd has 5 properties in its portfolio. They are:

• The Venetian Macao (VM)
  VM is the trophy asset of Sands China Ltd. Opened in 2007, VM offers a total of 374,000 sq. ft. of casino and gaming area, where it features 644 table games and 1,414 slot machines. It also has 943,000 sq. ft. of retail and dining area and features a 39-floor 5-star hotel.
  
  In 2018, VM has made US$ 3.47 billion in revenues, accounting for 40% of Sands China Ltd’s total revenues. It is a major improvement after VM has recorded a sharp decline in revenue in 2015 and 2016 as a result of a slowdown in the overall gaming industry in Macao.

Source: Annual Reports of Sands China Ltd

• Sands Cotai Central (SCC)
  Opened in 2012, SCC features 367,000 sq. ft. of gaming spaces as it has 392 table games and 1,118 slot machines. Besides, it offers 520,000 sq. ft. of retail spaces and 4 hotel towers under brands such as Holiday Inn, Sheraton, Conrad, and St. Regis.
  
  In 2018, SCC had generated S$ 2.15 billion in revenue, thus, accounting for 25% of Sands China Ltd’s total revenues. Likewise, the sales increase in 2018 is a recovery from a slowdown experienced in 2015 and 2016.

Source: Annual Reports of Sands China Ltd

• The Parisian Macao (Paris M)
  Paris M is the most recent addition to Sands China Ltd’s portfolio as it is opened in September 2016. It has 253,000 sq. ft. of gaming spaces with 327 table games and 870 slot machines. In addition, the real estate has 296,000 sq. ft. of retail and dining area. In 2018, Paris M had generated US$ 1.53 billion in revenues, thus, accounting for 18% of total revenues to Sands China Ltd.
  
  
  
• The Plaza Macao (Plaza M)
  Plaza M is located adjacent to VM and offers visitors a total of 105,000 sq. ft. of gaming area with 116 table games and 157 slot machines. The real estate has 242,000 sq. ft. in retail spaces and includes Four Season Hotel Macao, a 360-room hotel run by Four Seasons Hotels Inc.
  
  In 2018, Plaza M has generated US$ 719 million in revenues or as much as 8% of the group’s total revenues. Despite an improved performance, Plaza M has yet to recover to its peak, where it brought in above US$ 1 billion in revenues from 2012 to 2014.

Source: Annual Reports of Sands China Ltd

• Sands Macao
  Sands Macao is the first Las Vegas-style casino in Macao. It was opened in May 2004 and has 213,000 sq. ft. of gaming area with a total of 206 table games and 715 slot machines.
  
  In 2018, it has generated US$ 650 million in revenues or as much as 8% of the group’s total revenues. Sales for Sands Macao has been declining since its peak of US$ 1.28 billion in 2011.

Source: Annual Reports of Sands China Ltd

Group Financial Results

Collectively, Sands China Ltd has delivered the following financial results:

• Group Profitability
  Overall, Sands China Ltd has achieved CAGR of 11.3% in group revenues from US$ 3.30 billion in 2009 to US$ 8.67 billion in 2018. It is attributed to the following:
  
  – Opening of SCC in 2012.
  – Opening of Paris M in 2016.
  – Overall Sales Increment from VM for the last 10 years.
  
  
  They offset the decline from Sands Macao and a major slowdown in the gaming industry experienced in 2015 and 2016.
  
  This had caused shareholders’ earnings to:
  
  – Rise rapidly from US$ 215 million in 2009 to US$ 2.55 billion in 2014.
  – Drop Substantially to US$ 1.22 billion in 2016 due to the slowdown.
  – Recover Marginally to US$ 1.88 billion in 2018.

• Understanding Stock Price Movements of Sands China Ltd
  If you compare the above charts (revenue and shareholders’ earnings) with its stock price chart below, we would find that all three charts are similar as its stock price had moved in tandem with its sales and profits over the last 10 years.

Source: Google Finance

• Cash Flow Management
  From 2009 to 2018, Sands China Ltd has generated US$ 20.81 billion in operating cash flows and US$ 1.79 billion in equities. Out of which, the casino operator has spent:
  
  – US$ 6.86 billion in capital expenditures (CAPEX).
  – US$ 2.26 billion in net long-term debt repayments.
  – US$ 13.44 billion in dividend payments to its shareholders.
  
  It has raised its cash balance from US$ 908 million in 2009 to US$ 2.68 billion in 2018. Thus, it has demonstrated solid cash flow management as it is able to generate positive cash flow from operations consistently and thus, sustaining its ability to pay dividends to its shareholders.

Source: Annual Reports of Sands China Ltd

• Balance Sheet Strength
  As at 31 December 2018, Sands China Ltd has US$ 5.71 billion worth of long-term debt and US$ 4.41 billion in shareholders’ equity. As such, its gearing ratio is 129.4%. In a glance, it looks like Sands China Ltd is quite a high-geared company. But, if we take a look at its operating cash flow, it made approximately US$ 2.0 billion in cash flows from operations per annum. Hence, it has the ability to fully utilise its operating cash flows to settle all of its long-term debt within 2 – 3 years.
  
  

Future Prospects:

The following are points which would impact Sands China Ltd’s performances in the future:

• New Incoming Supply:
  Looking ahead, Sands China Ltd expects competition to be heightened due to the incoming supply of the Grand Lisboa Palace, a resort consisting of 2,000 rooms in Cotai in 2H 2019.  
  
  
  
• Growth Prospect:
  In 2018, Sands China Ltd has announced that it would renovate, expand and rebrand Sands Cotai Central into The Londoner Macao. It would be adding the following:
  
  – 370 luxury suites in the apart-tower adjacent to St. Regis.
  – 290 additional premium quality suites at Four Seasons Suites Macao.
  
  The total costs associated with these development projects are expected to be US$ 2.2 billion and would be completed in phases throughout the year 2020 and 2021.
  
  
  
• Main Risk:
  The sub-concession agreement held by Sands China Ltd is scheduled to be on June 26, 2022. If the agreement is not extended, Sands China Ltd would have to transfer its casino premises and its related equipment to the Macao Government on June 26, 2022 without compensation.
  
  
  

Stock Valuation

As I write, Sands China Ltd is trading at HK$ 42.00 a share. Thus,

• P/E Ratio
  In 2018, Sands China Ltd had generated HK$ 1.82 in earnings per share (EPS). Thus, its current P/E Ratio is 23.08, close to its 10-Year Average of 24.96.
  
  
  
  
  
• P/B Ratio
  In 2018, Sands China Ltd has net assets of HK$ 4.27 per share. Thus, its current P/B Ratio is 9.84, which is closer to its 10-Year Average of 10.22.
  
  
  
  
  
• Dividend Yields
  Sands China Ltd has paid out HK$ 1.99 in dividends per share (DPS). So, based on its current stock price of HK$ 42.00 a share, its dividend yield is 4.74% per annum, which is below its 5-Year Average of 5.87% a year.
  
  

VIA’s Verdict

Sands China Ltd’s portfolio is a mixed-bag as it possesses key assets that deliver a string of good results and a couple of assets that are delivering weaker results over the last 10 years.

In terms of valuation, Sands China Ltd is trading at:

– P/E Ratio below its 10-Year Average.

– P/B Ratio above its 10-Year Average.

– Dividend Yields below its 5-Year Average.

So, would you invest in Sands China Ltd at HK$ 42.00 a share?

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