A record-breaking first half for Macau casino operator Sands China could mask the risk of a sudden slowdown in the second half of the year as the mass gaming segment drops off and construction remains halted on the company's new Cotai resort.
The casino operator posted a record adjusted earnings before interest, taxes, depreciation and amortisation of US$1.74 billion, up 35.7 per cent year on year, driven by the mass and premium mass segment.
Revenue rose 24.7 per cent to US$5.08 billion, while net profit jumped 45.7 per cent to US$1.37 billion.
Shares of Sands ended 0.19 per cent higher at HK$53.25 yesterday in a market that rose 0.62 per cent.
As the Macau casino operator with the largest capacity, both in terms of gross gaming area and number of hotels, Sands has been among the top picks of many analysts in the supply-constrained market.
As the mainland's anti-graft campaign, concerns over junket liquidity and crackdown on UnionPay started to weigh down on the VIP segment, Sands, with its mass focus exemplified by flagship property the Venetian, enjoyed brisk business, outperforming its rivals over the critical Lunar New Year period.
However, the company faces considerable headwinds in the second half. Mass table revenue growth slowed sharply last month, to 17 per cent year on year from an average 35 per cent for the first half.
Reasons for the dramatic drop are still unclear although a combination of factors have been suggested, such as the World Cup soccer championship, changes to the transit visa, and general fatigue of visitors. In any case, a continued mass gaming drop-off would leave Sands most exposed.
That led Morgan Stanley to downgrade the stock from its best-ideas list last week. In the note, the investment bank also cites a high base in the second half of last year, overall investor sentiment that will keep the share price down, and decreasing market share.
"Parisian (the next Cotai project) adds just 20 to 30 per cent capacity in terms of hotel rooms and tables to Sands' existing base. This compares with 50 to 200 per cent for the other five companies. [Also,] construction at Parisian has stalled following an accident," the report said.
Work on the US$2.7 billion resort, which will include a half-scale Eiffel Tower replica, has been halted for two months although the management said it was still on track for opening late next year.
"We have commenced construction activities, but stopped in June, pending receipt of certain government approvals, which management has been informed are scheduled to be issued in October," Sands said in a statement to the stock exchange yesterday.
A government-mandated smoking ban for mass floors starting in October will also pressure Sands properties more than the other five operators.
"Implementing the smoking ban by October represents a tight deadline for the operators," Daiwa Capital Markets analyst Alison Law wrote.
"Some casinos will be unable to install airport-style smoking lounges in time, given their lack of a supporting infrastructure, and may therefore face a complete smoking ban."