The global financial crisis led to an initial public offering in 2009, and we continue to be grateful co-owners of Sands China. A single visit to Macau, where the company operates hotels and casinos, will provide an insight into an enormous construction boom – not least in infrastructure – which means many more years with even greater activity than today.
Gamblers love to visit the island of Macau and its many colourful casinos. And when they do, a lot of them stay in one of Sands China’s many hotel rooms that make up a third of the total number of rooms available for visitors on Macau.
Measured by number of rooms, the casino operator is by far the largest of the six casino operators on the island which measures merely 30 square kilometres – less than one tenth the size of Las Vegas.
This allows Sands China to benefit from the more than 30 million annual visitors to Macau, and the casino operator’s hotels enjoy occupation rates of more than 90 percent. Many new infrastructure improvements and expansions aim at making the trip to the island faster and more comfortable, meaning that the growth in visitors is far from expected to stop any time soon.
In recent years, there has been a change in Macau’s customer base. Since 2016, a little more than half of the gaming revenue has come from mass-market players, where previously a substantial majority came from VIP players. Last year, gaming revenue from the mass segment grew by just under 17 percent, and the high growth in this segment is expected to continue. Casino earnings on mass-market players are far higher than on VIP players. This is, among other things, because it is possible to have many more mass-market players present at the same time than with VIP players, and the related costs are much lower. VIP players often make extensive demands from casino operators to have free hotel rooms, food, drinks, and other benefits made available. VIP casino trips are also often arranged by a third party, a so-called junket, who will pocket part of the revenue.
The operating margin of the VIP gaming segment in Macau is estimated around 10 percent while the operating margin of the mass gaming segment is between 30 and 40 percent. This means that while just over half of the gaming revenue on Macau comes from mass-market gamblers, this customer segment represents more than 80 percent of earnings.
This development is positive for Sands China, who is targeting its hotels, casinos, and facilities at this segment, among other things by offering a large supply of hotel rooms at relatively low prices. 86 percent of Sands China’s gaming revenue comes from the mass-market segment, while the remaining 14 percent comes from the VIP segment. About a third of Sands China’s total revenue comes from non-gaming activities, such as hotels and shopping. The government has a greater focus on so-called non-casino related services, including conference and meeting facilities and entertainment. This is not a bad thing for casino operators. The earnings from non-casino related services are actually estimated to be higher than casino operations.
Sands China generates more than 30 percent of the total operating income on the island, making it the leading casino on this parameter, just as the hotel is the largest in terms of number of rooms. The company’s earnings are growing faster than revenue, meaning growing margins. While the company’s gaming revenue increased by 14 percent last year, earnings increased by 18 percent. As a result, the company’s operating margin increased by one percentage point to more than 35 percent.
World’s longest sea bridge has opened
Macau was a Portuguese colony until 1999 when the island was returned to China. This, however, was in the form of a Special Administrative Region (SAR), meaning that Macau has kept its own constitution and currency. As mentioned, infrastructure to and from mainland China is undergoing improvement these years. The latest development is a 30-kilometre-long bridge, the longest bridge over water in the world. For comparison, it is more than 15 times longer than the Golden Gate Bridge in San Francisco. It connects Hong Kong’s international airport with Macau, significantly shortening the journey. Where it used to take between two and four hours to travel from the airport in Hong Kong to Macau, crossing the bridge takes down to 30 minutes. The long-awaited bridge was opened by Chinese president Xi Jinping in October last year, having been nearly a decade in the making.
In the first complete month after the opening, almost 440,000 travellers came to Macau via the bridge. This was around 13 percent of the total number of visitors that month. So far, the bridge has particularly increased the traffic of mass-market players and visitors who want to take advantage of the island’s non-casino related facilities, as the bridge is cheaper than the ferry. This is a positive development for Sands China whose casinos and hotels, as mentioned, are targeting these segments.
Infrastructure projects lined up
The bridge is expected to positively impact the already growing number of visitors to Macau and thereby generate even more visitors to Sands China’s many hotels and other facilities. Sands China owns the largest conference facilities in Asia. The newly opened bridge may help move some of the conference activities from Hong Kong to Macau where conference prices are about half of those in Hong Kong.
All other things equal, this should create high demand and help fill up the many hotel rooms, even though this is not a problem today. Presuming that conference guests will not go straight to bed once the conference is over, it is also very likely that this will create further growth in casino operations as well as in relation to food, beverage and entertainment. The sale of food and beverages, as well as renting out shopping areas, is an attractive business for hotel owners, and we expect that it will make a positive contribution to future earnings growth. However, casinos are – and will continue to remain – what Macau revolves around.
The bridge is far from the only infrastructure project that has been on the drawing board. A 40-kilometre-long extension of the railway currently running between the two Chinese cities of Guangzhou and Zhuhai will be extended so that it will include Hengqin in the future. On Hengqin, where there are big plans of building a holiday paradise (read more about the plans for the island in the text about our other casino ownership, Galaxy), a bridge provides direct access to the Cotai part of Macau where most of the island’s big casinos are found, including Sands China and Galaxy. These extensions are expected to be opened this year and over the coming years.
In addition to the railway extension and the new bridge, work is ongoing to increase the number of ferry terminals, as ferries have long been – and are expected to continue to be – a much-used type of transportation for travellers to Macau. There are also plans for the construction of a light railway to make it easier to move between the many casinos on the island. This will, of course, be linked to places that serve as the starting destination for visitors to the island. Our experience from our many visits to the island is that the buildings of our casino operators are among the first things you see upon arrival.
Construction is heading upwards – and with inspiration from London
The Sands China hotels include The Venetian, The Parisian, and Sands Cotai Central. These hotels are generally at a lower price level due to Sands China’s focus on the mass-market segment which, as previously mentioned, is more profitable than the VIP segment and represents far more business in Macau than it did just a few years ago. These hotels also appeal to guests who are not interested in gambling by offering many other types of entertainment. One might, for example, take a gondola ride on one of the three artificial canals at The Venetian which draws inspiration from the Italian city of Venice, as suggested by its name. At The Parisian, inspired by the French metropolis of Paris, visitors can go up in the Eiffel Tower and enjoy the views of the colourful island.
Sands China is in the middle of a process of substantially upgrading its current capacity. Unfortunately, they have no more free space to build on but can instead optimise their existing hotels – for example by building skywards. Several of the hotels are being extended by more rooms and suites, positioning Sands China for the more exclusive part of the mass-market segment called premium mass.
In 2019, Sands China plans to start a project of transforming the existing Sands Cotai Central to a new resort, The Londoner, which, like The Venetian and The Parisian, will be themed after a European metropolis. This hotel will also be targeted at the mass-market segment and include attractions and inspiration from London. The first phase is expected to be ready for guests in 2021.
Over the years, Sands China has invested heavily in extending its many resorts on the island. Back in 2015 and 2016, the group’s investments were 15 percent of revenue, the highest level among our companies. Including the substantial renovation of the future The Londoner, total investments are expected to reach 15 billion US dollars. When the planned projects are completed, however, it is expected that the maintenance investments will fall below three percent of revenue. This opens up for an expectation of significant increases in free cash flows which can potentially benefit shareholders in the form of higher dividends. The dividend yield is currently just under six percent, which is the highest yield amongst the Macau operators. We see this as an attractive direct return on an investment which we expect to increase. We also expect that operations will result in significant increases in free cash flows.
The global financial crisis led to listing – thankfully
Sands China is majority owned by the American casino operator Las Vegas Sands. Las Vegas Sands is headed by the visionary founder, CEO and Chairman of the Board, Sheldon Adelson. Las Vegas Sands is the largest casino operator in the American casino mecca Las Vegas. Las Vegas has previously gone through the same development that Macau now faces – where casino activities become less dominant and an increasing level of non-gambling related activities is seen. Back then, Adelson was the driving factor behind the process, and we see this experience as a clear advantage for Sands China.
Las Vegas Sands owns 70 percent of Sands China and is therefore a majority shareholder in the Macau company. Las Vegas Sands benefits from the Sands China cash-flows through dividends, which also benefits the rest of the shareholders. As mentioned, Sands China pays out high dividends of just under six percent of its market capitalization. Although we appreciate companies that invest our capital in value-creating projects, we are also pleased when they are encouraged to maintain a certain level of dividends.
Sands China was listed when Las Vegas Sands had liquidity issues during the financial crisis in 2009. This means that we can thank the crisis for giving us the opportunity to invest in the value-creating Macau business. As they say, there is no cloud without a silver lining. We definitely appreciate the opportunity of being co-owners of this fantastic company.