There’s a Silver Lining for Sands China in Macau

Dhara Ranasinghe|Senior Writer

A positive outlook for the mass segment in the world’s largest gaming market, Macau, could be the silver lining for the shares of Hong-Kong listed Sands China, which hit a seven-month low late last week after its parent company, Las Vegas Sands, reported second-quarter earnings that were  worse than expected, analysts told CNBC.

Sands Cotai Central

“This is a segment (mass-market) that continues to grow and is profitable, so that’s why we love shares in both Las Vegas Sands and Sands China at these levels,” said Grant Govertsen, Partner & Analyst at Union Gaming Research.

Shares of gaming operators in Macau have taken a hit from the weaker outlook for revenue growth as China’s economy slows. Sands China shares are down about 30 percent from a peak hit in mid-April, while Hong-Kong listed rivals, Wynn Macau, a unit of U.S. gaming company Wynn Resorts, and SJM Holdings, founded by Hong Kong billionaire Stanley Ho,have fallen around 38 percent and 24 percent, respectively in the last three months.

Las Vegas Sands reported last week that net income at its Macau unit, Sands China, fell 40 percent year-on-year to $160.5 million in the second quarter because of higher-than-expected opening expenses at Cotai Central, the new Sands’ Macau casino that opened in April, and on a $1.01 billion impairment charge on two land parcels.

“We’re not worried about the Las Vegas Sands results. If you look at Macau there’s no other casino that can touch them in terms of what they have to offer the mass market,” said Govertsen.

He adds that Sands China is better positioned than its competitors like SJM to tap the middle class visitors especially from China given the expected growth in the number of hotel rooms, slot machines and table games that it operates directly.

Sands China shares gained some lost ground on Monday, climbing almost 6 percent to HK$23.15 ($2.98). CLSA’s Analyst Richard Huang says Sands China is his top pick among Macau gaming stocks. He said CLSA has a buy recommendation on the stock with a target price of HK$33.3.

“Mass market gaming revenue growth has remained robust. The mass gaming segment is also the high-profit margin segment with an Ebitda margin at around 40 percent (versus a VIP gaming Ebitda margin of around 10 percent). And Sands China is the company with the highest exposure to the mass market,” Huang said.

According to Fitch Ratings, The VIP segment makes up slightly more than 70 percent of the overall market in Macau and over the last several years has grown faster than the mass market.

“However, we expect that to change over the next several years, with faster growth occurring in the mass market. The mass market will likely make up an increasingly larger portion of the market, as the next wave of supply growth starts to come on line in 2015-2016,” Fitch said in a report published last week.

Fitch Ratings last week revised down its 2012 Macau revenue growth forecast to 10-12 percent from 15 percent earlier to reflect a more cautious view in terms of the impact a slowdown in China will have in the near-term.

Macau gaming revenues grew 42 percent in 2011 and 58 percent in 2010, according to Fitch.

By CNBC's Dhara Ranasinghe