Sands China Earnings: Strong Recovery Across All Segments, and Further Upside in Coming Quarters

Sands China’s 01928 first-quarter adjusted EBITDA of USD 398 million beats market expectations, with strong recovery across all gaming and nongaming segments. A favorable mix shift toward high-margin mass business, along with the company’s multiple rounds of cost-cutting initiatives, also drove its EBITDA margin to 31.1% in the first quarter. With hotel room supply and airline capacity continuing to recover, we expect Sands China to extend robust growth momentum in coming quarters. We keep our 2023 revenue forecast at USD 5 billion, or 58% of 2019 levels, but lift our 2023 EBITDA margin assumption to 32%, up from 26.4% in our earlier forecast, to incorporate a strong margin expansion outlook. This leads to a 17.5% rise in adjusted EBITDA to USD 1.6 billion in 2023, and a rise in our fair value estimate of Sands China to HKD 25.00 per share from HKD 24.50. With share prices more than doubling over the past five months, we think the shares are fairly valued as of market close on April 20. But a continued recovery of tourism traffic to Macao will likely support the share price in the near term.

In the first quarter, Sands China temporarily closed about 3,800 rooms (31% of total rooms), amid a labor shortage. Management expects to operate a total of 10,700 rooms during the second quarter, or 89% its hotel room capacity, and bringing all the remaining rooms online before the summer peak season. We believe Sands China’s focus on the mass market, and its largest room counts in Macao, make it the key beneficiary to capture continued demand recovery. Sands China has also committed to investing at least USD 3.8 billion in Macao over the 10-year new concession through 2032, including new investment in meetings, incentives, conferences and exhibitions; iconic tourism attractions; development of its overseas marketing strategy; promotion of Macao’s cultural heritage; and so on. These will further strengthen its leadership in Macao, buttressing its intangible asset advantage.