Description

Investment Overview:

The bonds of Macau casinos are generally a long but I will focus on Sands China (5.4’s of ’28 at 85 for a 9.2% YTW) which I believe is best positioned to weather ongoing headwinds. Importantly, the Company has sufficient liquidity to manage several more quarters of lockdown and they also benefit from a parent Company sitting on ~$5Bn of cash from the proceeds of their sale of Las Vegas properties. Additionally, the Company has a market cap cushion of $18n vs net debt of ~$7Bn (~$6Bn at market) which provides substantial cushion for EV erosion. Sands China is one of the better positioned operators to come out of COVID restrictions with their relative emphasis on premium mass market and non-gaming activities.

Situation background:

Macanese casinos are being subjected to several negative cross-currents which are due to resolve themselves in the near/medium term.

·         First, China (including Macau) has obviously been under varying lockdown measures which has had a particularly detrimental impact on Macau’s tourism dependent casinos.

·         Second, Macanese casinos have been approaching the end of their license period. Initial gaming concessions were signed in 2002 and are set to expire at the end of this year.

·         Third, Macanese casinos have been negatively impacted by mainland restrictions on junkets and VIP tours as a way to crack down on capital outflows.

·         China, while still maintaining their Zero Covid policy, has taken recent incremental steps towards opening up-notably halving the mandatory quarantine period for inbound travelers from 14 days at a centralized facility + 7 days of at-home health monitoring to 7 days at a centralized facility + 3 days at home health monitoring. This is hardly a broad opening, but the incremental steps are positive.

·         WRT the licensing period, there are 6 current concessions and existing holders ought to be in pole position for any expansion. Notably, the most obvious potential new entrant (Genting) has already said they are uninterested in expanding to Macau. It’s hard to see any potential new entrants with the wherewithal and motivation to put together a compelling bid.

o   Just this week the government released the rules and terms for concession bidding, none of which came as a major surprise, but were generally positively received since it indicates that concession renewals are on track (from a high level, gaming taxes rise marginally from 39% to 40% and while some more granular details remain to be fleshed out, it’s evident that the economics don’t look set to change dramatically).

§  Specifically, the rules effectively give priority to incumbent operators by prioritizing operators with existing experience. The rules also aim to prioritize non-gaming revenue as well as revenue from visitors outside the mainland and a renewed focus on preventing money laundering (which, all things equal, ought to benefit operators like Sands which has deeper experience with these given their US based parents and existing focus beyond junkets)

·         Finally, regarding the crackdown on junkets and VIP tours, this has been a persistent game of whack a mole by Beijing and while it’s hard to see things easing directionally, casinos have been able to be very profitable even with these provisions in place.

o   More importantly, Sands China is one of the operaters least exposed to the VIP/junket segment so even if that channel is shut off indefinitely, Sands China will be fine.

Sands China:

·         Sands China has invested a total of $14Bn (vs ~$6Bn in net debt at market) building 5 properties in Macau which they now own: The Venetian, the Londoner, The Four Seasons, Parisian and Sands Macao.

·         Historically the Company has had relatively modest exposure to the most controversial segment of the market: VIP and pre-pandemic, they generated <25% of revenue from VIP (with EBITDA contribution from that channel in HSD) vs something like WYNN Macau which generated +40% of revenue and +20% of EBITDA from VIP or MGM China at ~33% and ~10%, respectively.

o   Instead, the Company has a sweet spot in the more Premium mass segments that are a reasonable reflection of their experience in Las Vegas which turned from a gaming oriented destination towards one with more exposure to high end/luxury travel and entertainment.

§  ~30% of EBITDA pre-COVID came from non-gaming vs Wynn in ~11% and MGM China in LSD

§   

Valuation/Liquidity:

·         Sands China is sitting on +$2Bn in liquidity (~$531MM in cash and the balance in revolver capacity). Even in an unrealistically draconian scenario of zero revenue, the Company has enough cash to last through YE.

o   Beyond that, their parent LVS has +$5Bn in liquidity following the sale of their Vegas properties and will be able to bridge liquidity shortfalls in the subsidiary.

o   No bond maturities until 2025 with recent covenant waivers until Jan 1 ’23 (which could obviously be extended if need be)

·         Hisotically, the Company has traded ~15x forward EBITDA vs current EV ~8x -re-COVID and cration multiple through the bonds ~2x pre-COVID.

o   Further, as mentioned, the Company invested ~$14Bn just to build their properties vs ~$6Bn in net debt at market implying attractive asset cushion.

Appendix:

Catalyst

Sufficient liquidity to make it through to the other side with large equity cushion