Sands China is "Too Expensive": Analyst


Sands China made a weak debut in Hong Kong on Monday as its initial public offering was "too expensive", said Gabriel Chan, research analyst at Credit Suisse.

The Macau unit of gaming giant Las Vegas Sands tumbled 10 percent at the open but extended its losses to shed as much as 15 percent from its offer price of HK$10.38. It finally closed down 10.2 percent at HK$9.32.

CS: Underperform Rating on Sands China

While Chan said he believes the company has a good growth story over a five-year period due to the addition of sites 5 and 6 in Cotai, he warned many execution risks could surface.

"That (addition of sites) could potentially cause an overrun, (an) opening delay and earnings disappointment," Chan cautioned on CNBC'sCash Flow.

Chan, who has an 'underperform' rating on the stock with a target price of HK$8.50, said the valuation error "could be painful on a tight balance sheet".

The valuation of Sands China's IPO came in at 13.3 times full-year earnings in 2011 EBIT over EBITA, he noted, representing a 50 percent premium over the sector average.

"That's why we think this is overly expensive," Chan said.

Although the gaming market in Macau showed growth of about 40 percent-plus annually, Chan added that real underlying growth was around 20-25 percent on-year due to adjustments from a low base.

"(With) all these new projects in Cotai, that will potentially add about 100 percent of gaming capacity and 170 percent of hotel room capacity in just one year's time. I think that takes time to absorb all these things and then that's why I believe initially ... all the casinos in Cotai will be under a period of under-utilization, that means a drag on their margins."