Sands China has settled yet another loan of USD1.75b in order to continue with the unfinished Plot 5 & 6 project in Cotai Strip, Macau.  The additional development will add another 800,000 sq. feet of convention space and 800,000 sq. feet of retail space.

Apparently no one was interested in buying over Sands hotel and residential assets offered earlier.

Why would Sands further increase in its financial gearing and to continue with Plot 5 & 6 casino-hotel-retail-convention properties in which, it is merely adding on more the same type of spaces in Macau?  Would it be better to conserve high cost capital for divest investment onto other parts of Asia such as Japan, Taiwan and Vietnam just near the horizon?

We believe that Sands China has not much option left but to continue with Plot 5 & 6 lots because it is likely that the casino operator was under pressure to complete its earlier obligation; otherwise Sands China might lose the remaining plots of lands allotted to them in Cotai.  If that happens, it is likely that Macau government may re-allocate that nice piece of land to Sands’ competitors (such as Wynn) or to a new player waiting at the door-step, casino companies such as Genting and Harrahs’ will not turn down such a great offer to be granted a ticket in Macau arena.

Under such circumstances, is the bet on plot 5 & 6 worthy of the risk?  Here’s our panel’s preliminary assessment:

*  Unless Macau authority removes the cap on maximum gaming tables (4,500 or so) in the territory, how could Sands new properties in Cotai to operate with additional gaming tables?

*  Beside the above restriction (cap) on total gaming tables, even by then if the number is increased, it is meaningless because in general the table games market is already in over-supply situation. VIP gaming has overwhelmed the scene and contributes vast majority gross revenue (approaching 75% of total casino revenue), it doesn’t need so many tables to be added. The trend is likely to continue for long time to come.

*  That leads to the next question: Will the mass gaming market grow?  It is unlikely to grow the current pie of mass gaming for Macau unless something fundamentally changed.  The industry’s average EBITDA margins is a telling sign on the wall. (Below 20%). Polarization of wealth (rich and poor) in China is getting from bad to worse.

*  So, why invest additional capital onto Cotai land mass with almost the same products – hotel rooms, casino floor, convention space, F&B, retails etc?  There will be only one outcome arising from such low return investment – it is merely an expansion of consumer floor space and not a corresponding growth in business volume. Just look at City of Dreams as a classic example of over-catered with low margin returns. By next year, Galaxy Entertainment Group’s mega resort is said to be joining the fight for consumer market, with exactly the same products too!

*  The growth in the past few months of casino revenue reported were mainly contributed by VIP Junket segment, hardly the mass market has grown in any direction.  It is long-winded to repeat this again and again, that this junket (& high credit risk) induced casino revenue growth only making the authority and high-powered junket syndicates laughing to the bank (with 40% gaming tax and up to 45% commission).  Low EBITDA margin syndrome will persist in Macau gaming landscape.  The only casino operator that feels comfortable is SJM which has (almost) no debt at all.

*  The continuation of Plot 5 & 6 by Sands China is definitely a bad news for City of Dreams in which they have yet to master the art of acquiring loyal (& sizeable) mass market patrons and the Galaxy mega resort that due to open in 2011.

*  In the long run, if Las Vegas Sands Corp. manages to turn around more healthy balance sheet overall, the company may join the winners’ club (alongside SJM and Wynn Macau). The stakes are high.

Courtesy. Expert IR

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