Strong Earnings for Macau Casinos, But Risks Ahead

Sands China reported third quarter earnings more than doubled from a year earlier on soaring gambling revenue growth in Macau and a strong performance at its casinos in Macau's Cotai Strip. The Hong Kong listed-unit of Las Vegas Sands reported net profit of $199.15 million for the three months ended Sept. 30. Revenue rose 27 percent to $1.08 billion.

Gabriel Chan of Credit Suisse is neutral on Sands China, and has a price target of HK $14.98. Chan says he is cautious on the construction progress of the gaming operator's $4.1 billion project, currently known as Sites 5 & 6, and is expected to be the world's largest casino. This comes after the Macau government imposed restrictions on the use of foreign workers resulting in a construction labor shortage. Chan adds that a lawsuit filed by a former CEO against Sands China may prolong the labor issue and further delay the project. Credit Suisse assumes the first phase of the development will open in early 2012, and any further delay would result in a downward earnings revision.

Acting Sands China CEO, Mike Leven said earlier, he expects clarity on the opening date by the end of the year. This after the company already announced a delay until the fourth quarter of 2011.

SJM Holdings, Macau's biggest gaming operator by revenue has yet to have a presence on the Cotai Strip, but according to Credit Suisse, the announcement of a detailed development plan can be expected as early as the first quarter of 2011, and could be a rerating catalyst.

SJM Holdings reported a six-fold surge on year in third quarter net profit to $112 million. Revenue rose 69 percent to $1.8 billion boosted by a surge in high roller gaming. In its latest earnings release, the company did not provide any specific update on expansion in the Cotai area, but in a written statement said it has "maintained the strength of (its) balance sheet, which positions (it) well for future expansion.

And as the race to develop on the Cotai Strip goes on, SJM Holdings and Sands China are also entangled in a tussle over land. In September SJM had sent a letter to the Macau government expressing interest in land on Cotai in which Sands China has already invested more than US $100 million.

Gary Pinge of Macquarie Securities says he expects SJM to "invest in the market and move on, developing its existing land parcel, with government approval to be granted by the end of this year." Pinge says his top pick is Sands China, and remains neutral on SJM Holdings.

Investors too, haven't been bothered by the debacle, with share prices of Macau gaming stocks surging 45-180 percent year-to-date. The robust performance has been primarily driven by better than expected gross gaming revenue. In October, revenues hit a monthly record of  $2.3 billion. Macquarie Securities is cautious on the stretched stock valuations, and maintains its forecast of 50% on-year growth for full year gaming revenues.

Looking ahead to 2011, Pinge says Beijing's monetary tightening and its impact on junket liquidity will be a key risk factor for Macau's gaming sector.