19 September 2016 Asia Research Rating: Buy Price Target: HK$39.00 Price 52wk Range HK$35.95 HK$20.75 - HK $36.75 Shares Outstanding (MM) 8,070.2 Market Capitalization (MM) Enterprise Value (MM) HK$290,123.7 HK$319,025.4 30D Avg Volume (000s) 19,188.1 Short Interest/Float 0.0% Dividend Yield 5.5% YTD % Chg 35.4% YTD % Chg Relative to Index 30.7% Total Implied Return to PT 14.0% Pricing Date September 17, 40 35 30 25 20 1928-HKG Sands China Ltd. 2016 15 09/15 12/15 03/16 06/16 09/16 Sands China Ltd. Global Gaming Operators 1928-HKG HKSE HK$35.95 Company Update Parisian - SCL wallet share going up; foot traffic going away from Studio City Initial thoughts. Simply put, we think Parisian is the right product targeting the right market segments at the right time. The property has generally exceeded our expectations, and most importantly seems to hit the sweet spot of what a typical mainland mass market visitor generally responds well to (sense of grandeur, massive scale, European highlights). Based on our on-the-ground conversations in Macau, September GGR trends seem to be quite solid - especially for mass - and we expect the growth rate to accelerate significantly relative to August. MTD we also think casinos have generally played somewhat lucky with VIP. With positive market trends in mind, a positively inflecting mass story for SCL, and increasing institutional interest in Macau, we want to own names that are particularly geared towards a mass recovery. We reiterate our Buy rating on shares of SCL and are raising our PT to HKD39 (+7). Beginning to see early signs of increased mass market wallet share for SCL. Over the first several days of operations at Parisian we've kept on eye on foot traffic patterns, particularly as it relates to the four SCL properties on Cotai, as well as Studio City. The volume of foot traffic between Venetian and Parisian, as well as the volume of foot traffic between Cotai Central and all three SCL properties on the west side of the Cotai Strip (Parisian / Four Seasons / Venetian) is many multiples of the volume of foot traffic between Parisian and Studio City (same goes for COD). The early trends are falling inline with our view that the combination of SCL assets on Cotai will result in the company extracting a greater wallet share of visitors to Cotai than before. Within a couple months all four SCL Cotai properties will be physically connected with no need to set foot outside, which is likely to ratchet up wallet share of base mass customers even further with Venetian and Parisian being the greatest beneficiaries. This dynamic reinforces our current forecast for SCL for ~20% mass / slots GGR growth in 2017 relative to the market as a whole at +11%. Parisian a potential headwind for Studio City. Conventional wisdom suggested that the opening of Parisian would be a net benefit for Studio City as a driver of base mass foot traffic. While we have, indeed, seen a greater volume of people walking to Studio City now that Parisian is open we have noticed a more troubling trend (albeit these are early days so things aren't yet definitive). Based on multiple observations over this past weekend, we consistently observed more persons walking to Parisian (from Studio City) than to Studio City (from Parisian). In other words, a net migration towards Parisian. The bottom line is that Parisian seems to be significantly more compelling than Studio City from a mass market consumer perspective and should these trends be maintained Parisian could prove less of a benefit and more of a headwind for Studio City. Analysts Grant Govertsen Tel: 853-2857-5825 grant.govertsen@uniongaming.com Year to Dec Net Revenue Property EBITDA Adjusted EBITDA EPS 2016E 51,304 16,683.0 16,401 1.51 Prior 50,509 16,433.3 16,156 1.49 2017E 61,017 19,743.6 19,408 1.80 Prior 60,478 19,557.4 19,225 1.79 *Please see analyst certification and required disclosures starting on page 4 of this report. 2016 Union Gaming. All rights reserved. No part of this report may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying or by any information storage and retrieval system, without permission in writing from Union Gaming.
Figure 1: Sands China SOTP valuation Sands China - Sum of the Parts Analysis Casino/Hotel Operations Venetian Macau (ex. Retail) $6,879 14.0x $96,309 Four Seasons Macau (ex. Retail) 873 13.0x 11,345 Sands Cotai Central (ex. Retail) 4,690 14.0x 65,661 The Parisian (ex. Retail) 1,917 14.0x 26,836 Sands Macau 1,409 14.0x 19,730 Cotai Jet 240 10.0x 2,405 Corporate (529) 8.0x (4,230) Subtotal TEV $15,480 14.1x $218,055 Retail Mall Operations Shoppes at Venetian 1,533 33.0x $50,596 Shoppes at Parisian 702 33.0x 23,181 Shoppes at Four Seasons 1,013 33.0x 33,434 Shoppes at Cotai Central 473 33.0x 15,622 Subtotal TEV $3,722 33.0x $122,833 Total Enterprise Total Enterprise Value $340,888 (-) Sands China debt (34,856) (+) Sands China cash 5,091 Implied equity value $311,123 Shares outstanding 8,071 1928-HK PRICE TARGET $38.55 Source: Union Gaming Figure 2: Sands China financial model HK $ in millions. FYE December 2014A 2015A 1Q16A 2Q16A 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E Revenue Sands Macao $9,121 $6,830 $1,359 $1,436 $1,420 $1,405 $5,621 $1,367 $1,277 $1,351 $1,336 $5,331 Venetian Macao 31,371 23,191 5,815 5,172 5,731 5,539 22,257 5,667 5,430 5,617 5,891 22,605 The Plaza (Four Seasons) 8,600 5,365 1,151 971 1,294 1,280 4,696 1,220 1,201 1,274 1,268 4,963 Cotai Central 24,332 16,940 4,117 3,670 4,094 3,832 15,713 4,177 4,002 4,134 4,232 16,545 Cotai Jet 1,178 1,241 300 319 344 336 1,298 309 329 354 346 1,337 The Parisian 0 0 115 1,604 1,719 2,152 2,545 2,737 2,803 10,236 Total Revenue $74,603 $53,567 $12,743 $11,567 $12,998 $13,996 $51,304 $14,891 $14,785 $15,467 $15,874 $61,017 Revenue Growth % year-over-year Sands Macao (5.0%) (25.1%) (22.3%) (23.4%) (11.8%) (11.9%) (17.7%) 0.6% (11.1%) (4.9%) (4.9%) (5.2%) Venetian Macao 4.9% (26.1%) (4.9%) (9.9%) 5.5% (6.2%) (4.0%) (2.5%) 5.0% (2.0%) 6.3% 1.6% The Plaza (Four Seasons) 4.0% (37.6%) (8.1%) (38.8%) (0.7%) 4.6% (12.5%) 6.0% 23.8% (1.6%) (1.0%) 5.7% Cotai Central 16.1% (30.4%) (7.3%) (14.7%) (4.2%) (2.4%) (7.2%) 1.4% 9.0% 1.0% 10.4% 5.3% Cotai Jet 8.7% 5.3% 8.8% 6.6% 2.0% 2.0% 4.6% 3.0% 3.0% 3.0% 3.0% 3.0% The Parisian NA NA NA NA NA NA NA NA NA NA Total Revenue 6.9% (28.2%) (7.9%) (16.2%) 0.3% 7.8% (4.2%) 16.9% 27.8% 19.0% 13.4% 18.9% EBITDA Sands Macao $2,628 $1,755 $397 $377 $376 $372 $1,523 $362 $336 $358 $354 $1,410 Venetian Macao 12,005 8,374 2,079 1,898 2,103 2,050 8,130 2,066 2,030 2,101 2,221 8,418 The Plaza (Four Seasons) 2,911 1,890 374 339 466 461 1,640 469 448 480 489 1,887 Cotai Central 7,776 5,058 1,269 1,119 1,269 1,207 4,864 1,303 1,241 1,282 1,342 5,167 Cotai Jet 27 177 60 55 52 50 217 56 59 64 62 241 The Parisian 0 0 21 289 309 430 611 739 841 2,621 Total Property EBITDA $25,347 $17,255 $4,179 $3,788 $4,287 $4,429 $16,683 $4,686 $4,725 $5,023 $5,309 $19,744 Corporate Expenses (410) (295) (70) (64) (71) (77) (282) (82) (81) (85) (87) (336) Total Adjusted EBITDA $24,937 $16,960 $4,109 $3,725 $4,215 $4,352 $16,401 $4,604 $4,644 $4,938 $5,221 $19,408 % growth year-over-year 12.5% (32.0%) 1.5% (13.5%) 1.3% (2.0%) (3.3%) 12.1% 24.7% 17.2% 20.0% 18.3% LTM Adjusted EBITDA $24,937 $16,960 $17,021 $16,438 $16,491 $16,401 $16,401 $16,896 $17,815 $18,538 $19,408 $19,408 % growth year-over-year 12.5% (32.0%) (22.0%) (17.8%) (8.2%) (3.3%) (3.3%) (0.7%) 8.4% 12.4% 18.3% 18.3% EBITDA Margins Sands Macao 28.8% 25.7% 29.2% 26.3% 26.5% 26.5% 27.1% 26.5% 26.3% 26.5% 26.5% 26.5% Venetian Macao 38.3% 36.1% 35.8% 36.7% 36.7% 37.0% 36.5% 36.5% 37.4% 37.4% 37.7% 37.2% The Plaza (Four Seasons) 33.8% 35.2% 32.5% 35.0% 36.0% 36.0% 34.9% 38.4% 37.3% 37.7% 38.6% 38.0% Cotai Central 32.0% 29.9% 30.8% 30.5% 31.0% 31.5% 31.0% 31.2% 31.0% 31.0% 31.7% 31.2% Cotai Jet 2.3% 14.3% 19.9% 17.4% 15.0% 15.0% 16.7% 18.0% 18.0% 18.0% 18.0% 18.0% The Parisian Total Adjusted EBITDA 33.4% 31.7% 32.2% 32.2% 32.4% 31.1% 32.0% 30.9% 31.4% 31.9% 32.9% 31.8% Source: Union Gaming 2
Valuation We are raising our price target to HKD39. Our price target is based on blended 14x multiple of our forward (2017) estimates for Sands China (excluding Retail mall contribution), as well as a 33x multiple (or an implied 3% cap rate under an assumption of future monetization) on Retail mall contribution. This multiple represents a premium to the multiples we apply to most of the company's peer group in Macau, but we believe this is justified given the company's strength in the mass market segment, which should be augmented by the opening of Parisian in September 2016. New estimates For the full years 2016 and 2017, we are modeling EBITDA of HKD16,401mm (-3% y/y) and HKD19,408mm (+18% y/y) in EBTIDA, respectively. These estimates are above consensus, currently at HKD15,883mm (UG +3% to consensus) and HKD17,817mm (UG +9%) for 2016 and 2017. Please see the above figure for detailed financial estimates. Risks Risks to shares of Sands China include: a slowdown in Chinese customer demand, both VIP and mass, driven by a macro-economic slowdown out of China, the potential for further currency devaluations against the HKD, the influence from Beijing which could have a material impact on visitation to Macau (e.g. visa restrictions), the impact of the mass market smoking ban and the potential for a VIP and total smoking ban, any UnionPay related restrictions, incremental regional competition (e.g. Philippines, Taiwan, Vietnam, etc.) vying for Macau s VIP customers, incremental competition opening on Cotai over the coming months and years, the timing of the company's pipeline property on Cotai, and opaqueness surrounding the renewal of the company s license expiration in 2022. 3
Important Disclosure Analyst Certification The analyst, Grant Govertsen, primarily responsible for the preparation of this research report attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research analyst s compensation was, is, or will be directly related to the specific recommendations or views in this research report. Ratings Definitions Current Ratings Definition Union Gaming Securities LLC and Union Gaming Securities Asia Limited use a traditional ratings construct (Buy, Hold, and Sell) that is underscored by percentage upside/downside from current trading levels along with dividend yields for total return. We exclude special dividends and contemplate regular dividends only in our total return forecasts. These are absolute ratings, not relative or forced ratings. We define a Buy rating as a company whose shares exhibit total return (appreciation and dividends) potential of at least 15% within the next 12 months, and conversely a Sell rating as a company whose shares exhibit downside potential of at least 15% within the next 12 months. A Hold rating is reserved for companies whose shares exhibit total return potential between those parameters. Buy the total forecasted return is expected to be greater than 15% within the next 12 months Hold the total forecasted return is expected to be greater than or equal to 0% and less than or equal to 15% Sell whose shares exhibit downside potential of at least 15% within the next 12 months Suspended the company rating, target price and earnings estimates have been temporarily suspended. Valuation and Risks Valuation Valuation Methodology for Price Target: Enterprise Value-to-EBITDA, Sum-of-the-Parts Analysis, Price-to-Earnings Ratio, Discounted Cash Flow Analysis, Price-to-AFFO, Net Asset Value. Risks Investment Risks: Union Gaming Securities equity research team covers the casino, gambling, gaming, lottery and related sectors. The companies operating within these sectors generally have a global presence or significant exposure to China and Las Vegas, among other markets. In addition, the markets that companies in these sectors operate are highly regulated by local and federal governments. Risks across or specific to one or more of these sectors include regulatory or legislative impacts related to licensing, tourism or the competitive landscape. Licenses to operate gaming facilities or supply gaming equipment or lottery services are often governed by regulatory authorities. Additional Risks for investing in these sectors include volatility in consumer discretionary spending and consumer confidence, currency, interest rates, unemployment rates, access to capital, the cost of capital, commodity costs, geopolitical uncertainty, and unfavorable government regulations. Companies operating within our covered sectors rely in part on tourism, and business trends could be impacted by changes or influences to tourism in a given market or markets, including visa policy, transit policies and security, transportation infrastructure, weather and natural disasters. Ratings Distribution (as of 09/19/2016) Coverage Universe Investment Banking Services / Past 12 Months Ratings Count Pct. Rating Count Pct. BUY 13 65% BUY 3 23% HOLD 7 35% HOLD 0 0% SELL 0 0% SELL 0 0% Sands China Ltd. Rating History as of 09/15/2016 powered by: BlueMatrix B:$59.00 10/17/13 B:$76.00 01/30/14 H:$57.00 06/09/14 H:$56.00 08/12/14 H:$45.00 10/15/14 B:$46.00 01/26/15 B:$47.00 01/29/15 B:$40.00 04/23/15 B:$77.00 04/24/15 B:$40.00 06/12/15 B:$37.00 07/22/15 B:$34.00 10/12/15 B:$33.00 10/22/15 80 70 60 50 40 30 B:$31.00 01/27/16 20 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 B:$32.00 04/21/16 Closing Price Target Price 4
General Disclosures Additional information is available upon request. This report was prepared by Union Gaming Securities Asia Limited. Union Gaming Securities Asia Limited is a licensed corporation with the Securities and Futures Commission (SFC) in Hong Kong and wholly owned subsidiary of Union Gaming Group LLC. Union Gaming Group LLC also owns Union Gaming Securities LLC, a FINRA member firm and Union Gaming Analytics LLC. All questions or comments concerning this research report should be addressed to Union Gaming Securities Asia Limited at +853 2857 5825. Union Gaming Securities, LLC ("UGS"), an affiliate of Union Gaming Securities Asia Limited, does not own any securities of any company analyzed in the research reports it distributes. Neither Union Gaming Securities LLC nor its affiliates or analysts serve as an officer, director or advisory board member of any Subject Company. UGS, its affiliates, analysts and employees may have received investment banking, non-investment banking securities and non-securities service, related compensation from the subject company in the past 12 months. It further intends to seek compensation for investment banking, non-investment banking securities and non-securities service, related activities in the next three months. Accordingly, investors should be aware that the firm and its affiliates may have a conflict of interest that could affect the objectivity of the reports it distributes. UGS is not now nor has ever been a market maker. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Bloomberg and Factset. Data is sourced from Union Gaming Securities LLC, Union Gaming Securities Asia Limited, and subject companies. Union Gaming Securities LLC and Union Gaming Securities Asia Limited are not responsible for errors in prices provided by independent sources. Data, analyses, and reports necessarily contain time-sensitive information, and no subscriber or client should rely on dated reports or conclusions. Investor clients and financial advisers should consider any report from Union Gaming as only a single factor in making any investment decision. 5