Sands China Ltd - Building on more than sand

[ 1 ] INITIATING COVERAGE 24 March 2010 OUTPERFORM Sands China Ltd HK$12.14 @23/03/10 Building on more than sand Target: HK$15.21 Gaming HONG KONG/ CHINA 1928 HK / 1928.HK Tan Teng Yee +852 2532 1119 – tengyee.tan@cimb.com • Starting coverage with OUTPERFORM. Sands China is ideally placed to ride on the burgeoning growth of Macau’s gaming sector given i) its flagship properties’ strategic locations on Macau Peninsula and Cotai, ii) its strong brand equity and diversified product offerings, and (iii) the promising Cotai Strip development. Our end-FY10 SOP-based target price of HK$15.21 is derived from 15.5x FY11 EV/EBITDA and assumes that the company sells 80% of its apartment-hotels in FY10. We initiate coverage with an OUTPERFORM call, with the potential re-rating catalysts being i) better-than-expected gaming revenue and patronage, ii) asset unlocking efforts and iii) quicker-than-expected construction of Parcels 5&6. • EBITDA market leader. Sands China leads the Macau gaming industry in terms of EBITDA, capturing 36% of the sector’s 1H09 EBITDA. We like Sands China’s EBITDA margin leadership position and mass-market focus, which should benefit from i) the still-low visitor penetration rate from neighbouring Guangdong, and ii) the government’s aim to promote Macau as a tourism and convention destination. • Promising Cotai Strip development. Having secured sufficient funding, Sands China is gearing up to resume construction of Parcels 5&6. We are optimistic that Parcels 5&6 will complement the company’s existing properties and will be a majorearnings catalyst for Sands China. Financial summary FYE Dec200820092010F2011F2012FRevenue (US$ m)3,053.3 3,301.1 3,876.0 4,707.3 5,730.1 EBITDA (US$ m)562.2 690.4 912.7 1,117.9 1,387.3 EBITDA margins (%)18.4%20.9%23.5%23.7%24.2%Pretax profit (US$ m)175.9 220.2 400.4 475.5 713.2 Net profit (US$ m)175.7 220.0 400.4 475.5 713.2 EPS (US cts)2.2 2.7 5.0 5.9 8.9 EPS growth (%)(10.4%)25.2%82.0%18.8%50.0%P/E (x)71.6 57.2 31.4 26.5 17.6 Gross DPS (US cts)- - - - - Dividend yield (%)0.0%0.0%0.0%0.0%0.0%P/BV (x)10.1 3.4 3.1 2.8 2.4 ROE (%)16.7%9.3%15.0%11.5%15.2%Net gearing (%)258.0%51.9%55.3%50.2%26.4%P/FCFE (x)(10.6) (6.7) 33.5 95.5 (30.3) EV/EBITDA (x)28.1 21.0 16.3 13.3 10.1 CIMB/Consensus (x)0.98 1.07 1.20 Source: Company, CIMB Research , Bloomberg Price chart Market capitalisation & share price info Market cap HK$97,701m/US$12,587m Share price perf. (%) 1M 3M 12M 12-mth price range HK$12.14/HK$9.23 Relative 13.3 31.3 (25.1) 3-mth avg daily volume 10.7m Absolute 19.5 29.2 17.0 # of shares (m) 8,048 Major shareholders % held Est. free float (%) 30.0 Venetian Venture Development 70.0 Conv. secs (m) None 8.79.29.710.210.711.211.712.212.7Nov-09Jan-100.000.501.001.502.002.503.003.50Volume 100m (R.H.Scale)Sands China Ltd Source: Bloomberg Source: Company, CIMB Research, Bloomberg [ 2 ] Background One of the six. Incorporated in Jul 09, Sands China Limited (Sands China) develops, owns and operates integrated resorts and casinos in Macau. Wholly-owned Venetian Macau Limited (VML) holds one of the six concessions/sub-concessions issued by the Macau government for gaming operations in the former Portuguese enclave. The sub-concession licence, which will expire in Jun 2022, was executed among Galaxy Entertainment (27 HK, Neutral), the Macau government and VML in Dec 08. Instead of monetary payment, VML was required to bear half of Galaxy’s investment obligations of MOP8.8bn. Sands China currently owns and operates three integrated resorts and casinos, namely The Venetian Macao, Sands Macao and Plaza Macao (Figure 1). Providing a complementary mix of gaming, hotel, retail,