Sands China Earnings: Solid Recovery Continues, Rising Base Mass Volume a Key Positive

We maintain our Sands China 01928 fair value estimate of HKD 26.50, following in-line third-quarter results, which reflect continued demand recovery in both gaming and nongaming segments. We think the stronger rebound of base mass volume is a key highlight, helping to ease market concerns over a slower recovery of group tour volume and base mass traffic. We believe Sands China’s focus on the mass market, and its largest room counts in Macao—as well as a successful track record in nongaming activities—make it the key beneficiary to capture further demand recovery in Macao. Our long-term industry gross gaming revenue, or GGR, and Sands China profit forecasts are unchanged. We think the shares are undervalued as of market close on Oct. 19, after the recent share price weakness.

Despite a prolonged economic slowdown in China, third-quarter net revenue and adjusted EBITDA continued their growth trajectory, rising 9.9% and 16.6% from a quarter ago and hitting 85% and 84% of 2019′s levels, respectively, up from 76% and 71% in the prior quarter. More importantly, base mass GGR grew 17% sequentially, which drove an 8.5% sequential rise for the company’s total GGR, outpacing the industry GGR growth of 7.2%. In addition, the favorable mix shift toward the higher-margin base mass business and growing nongaming income also sent adjusted EBITDA margin up to 35.3%, from 33.2% in the prior quarter. Management remains upbeat for further margin expansions, as growing visitations and operating leverage will help to lift margins.

Sands China plans to start its Londoner Phase 2 project in November 2023, which will include renovation of the Sheraton and Conrad hotels and the Pacifica casino, as well as additional attractions and nongaming offerings. Although this may affect existing business over the next 15-18 months, we think the project will reposition the property toward the premium segment and elevate the customer experience, buttressing its competitiveness in the long term.