The performance of Q3 in 21 years is in line with expectations, and the performance of high-end retail is bright.
Q3 net income of Sands China in 21 years was $620 million (month-on-month ratio-28.0%); gaming revenue was $490 million (month-on-month ratio-36.9%), outperforming industry average (- 26.1%); adjusted property EBITDA was $32 million, or $0.44 million per month on 7-8-9. Standardized win rate excluding the "luck" component, the adjusted property EBITDA is $28 million (month-on-month-75.2%), in line with expectations. In August, there were a number of locally confirmed cases in mainland China and Macao, and the Guangdong and Macao governments tightened immigration controls, resulting in a quarterly decline in visitors to Macao and gambling revenue. However, high-end retail continued to record strong performance (business and individual travelers from Guangdong, Fujian, Shanghai, Beijing and other places), supporting the group's non-gaming revenue business (down only 4.4 per cent quarter-on-quarter), with four Seasons Hotel Mall tenants' sales per square foot reaching an all-time high, while the adjusted property EBITDA of four Seasons Hotel recovered to 56.0 per cent in the same period in 1919.
It is believed that the group has a better chance of license renewal.
In the results call, the management said that they were confident that they would be treated fairly in the auction or renewal of betting cards, and that they did not expect to lose their betting cards, and the company would continue to invest more in Macau or the Greater Bay area. Among the three US-funded gaming enterprises, we believe that Sands China still has a relatively large chance of winning gambling cards. Since entering Macau, the company has invested a total of US $15 billion, which has made a positive contribution to building a comprehensive resort and increasing the non-gambling elements of Macau. The long term can be the driving force for the long-term economic transformation and development of Hengqin and Macao. However, the future renewal criteria may require the company to increase its capital commitment and renewal fees.
The vaccination rates in Hong Kong and Macao are low, and it is difficult to see positive customs clearance signals this year. As of October 18, the vaccination rates in Macao and Hong Kong (at least one dose) reached only 64.6% and 60.5% respectively, which is still far below the 80% target rate for further relaxation of immigration measures with the mainland. Moreover, mainland China has adopted a zero tolerance attitude towards the epidemic, and it is expected that it will be difficult to see positive customs clearance signals within this year. As the relaxation of immigration measures is still not clear, gambling revenue is still on a slow path of recovery, and before the formal revision of the new "betting Law", it is believed that investors also tend to be cautious, so there is no catalyst to stimulate stock prices in the short term.
Lower the target price to HK $19.04 and maintain the "neutral" rating
Although the company's non-gaming business is more resilient, based on the operating situation of Q3 and the tightening of immigration controls in the mainland and Macao since October, we have lowered the adjusted EBITDA by 50.6% and 32.1% in 21-23 to US $330 million / 1.67 billion / 2.99 billion respectively. At the same time, in the short term, in response to the uncertainty brought about by the Gaming Law consultation on US-funded gaming companies, in particular, Sands China's long-standing high dividend policy will be unsustainable or will be required to increase more capital investment, which will reduce the potential return of shareholders, so the company's valuation multiple will be reduced accordingly, and the target price will be lowered from HK $25.8 to HK $19.04 corresponding to 15 and 7.4 times EV/EBITDA for 22 and 23 years, maintaining a "neutral" rating.
Risk tips: (1) tightening of visa policy; (2) tightening of entry and exit measures as a result of the spread of the epidemic; and (3) economic downturn to crack down on gambling demand.