Key points of investment
4Q23 Sands China's net revenue (approximately HK$14.51 billion) fell short of our expectations (approximately HK$15.13 billion) by approximately 4.1%. The company's net revenue recovered to 83.1% in the same period in 2019, and the degree of recovery decreased by 1.6 pct from month to month. Among them, the gaming/non-gaming business contributed HK$10.6.9/HK$3.85 billion in net revenue, which recovered to 77.5%/104.8% in the same period in 2019, respectively. The degree of recovery decreased by 1.2 pct/3.3 pct from month to month, respectively.
4Q23 The Company's adjusted property EBITDA (HK$5.10 billion) generally met our expectations (HK$5.23 billion). The company's adjusted property EBITDA recovered to 80.6% in 4Q19. The degree of recovery was lower than net income, resulting in an adjusted property EBITDA profit margin falling 0.2 pct to 35.1% month-on-month.
However, if the lower VIP win rate in 4Q23 is standardized, the adjusted EBITDA of 4Q23 properties will increase to about HK$5.38 billion, returning to about 88% of 4Q19, and the profit margin will increase to 35.9%, an increase of 1 pct compared to 3Q23. Looking ahead, we believe that although the 3-4% increase in employee remuneration from 2024 will suppress profit margins to a certain extent, the company's adjusted EBITDA profit margin is expected to maintain a high level of around 35% as the passenger flow structure continues to improve.
High-end midfielders are still leading the recovery, and regular midfielders will continue to return. 4Q23's high-end midfielder/ordinary midfielder achieved a profit of HK$53.8/5.69 billion respectively, recovering to 101%/93% in the same period in 2019, up 13%/7% month-on-month. The high-end midfielder business grew faster than that of ordinary midfielders. Looking ahead, management believes that with the further restoration of means of transportation, the number of visitors entering Macau will continue to grow, and regular midfield customers are expected to continue to return. At the same time, management pointed out that travelers are more willing to go to Macau, which is mainly reflected in: 1) Cotai Air's current flights have only recovered to 52% before the epidemic, but the passenger capacity has recovered to 93% before the epidemic; 2) foreign (especially Southeast Asian) travelers entering Macau in 4Q23 accelerated to 80-90%, ahead of the speed of flight recovery.
The Londoner has begun the second phase of the renovation project and is optimistic that the attractiveness of the company's properties will continue to increase. In 4Q23, the company achieved net revenue of HK$16.4/7.8/HK$1.25 billion respectively, and recovered to 114%/98%/98% in the same period in 2019, respectively, maintaining a high level. At the same time, according to DICJ data, the entire gaming industry in Macau achieved revenue of MOP 183.1 billion (approximately US$22.8 billion) in 2023, meeting the conditions for triggering gaming companies to increase non-gaming investment by 20%. We believe the company will further increase its non-gaming investment efforts. At present, the company's Sheraton Hotel has begun to be renovated and is scheduled to be completed in 1Q25. The company expects that the renovation project will disrupt 2H24's performance to a certain extent.
Profit forecast and investment rating: The company is a leader in midfield gaming and non-gaming businesses in Macau. We believe that the company is expected to fully benefit from the return of ordinary midfield customers; moreover, the company's valuation is highly attractive. The current EV/EBITDA is 10x, which is lower than the average of 15x over the past ten years by more than one standard deviation.
Our adjusted net income forecast for 2023-2025 is HK$517.5/602.3/66.33 billion, and the adjusted property EBITDA forecast is HK$174.7/227.1/25.92 billion. The current stock price is 13.5/10.4/9.1 times the 2023-2025 EV/EBITDA, respectively. Our target price is HK$36.0, maintaining a “buy” rating.
Risk warning: China's macroeconomic growth fell short of expectations, Macau's tourism recovery fell short of expectations, the overseas gaming market was diverted, and Macau's gaming supervision policy became stricter.