Las Vegas Sands Launches Macao IPO

Sands China, the Macau casino operations owned by Las Vegas Sands (LVS), yesterday kicked off the roadshow for its Hong Kong initial public offering with the aim of raising between HK$19.41 billion and HK$25.96 billion ($2.5 billion to $3.4 billion).

The launch came on the same day that China Minsheng Banking Corp kicked off an IPO of at least $3.6 billion, which looks set to become the largest Hong Kong listing so far this year. A couple of smaller companies that seek to raise a combined $700 million also started bookbuilding yesterday, namely Fantasia Holdings Group, a property developer which is hoping to raise up to $413 million (see separate story on our website today), and Sany Heavy Equipment, which revealed plans for a $310 million IPO.

Meanwhile, a number of other Hong Kong listing candidates have began pre-marketing ahead of a formal launch in the next couple of weeks. Among them are Resourcehouse, an Australian mining company seeking about $2.5 billion; Longyuan Power, a wind power generator looking to raise $1.5 billion to $2 billion; and China Forestry, which is hoping to raise $150 million to $200 million.

Bankers argue that there are sufficient funds to support both deals, as long as valuations are kept in check. The Hong Kong equity market has perked up again after a challenging couple of weeks during which it lost more than 1,000 points and a second straight day of gains yesterday saw the benchmark index return above 22,000 points. The most recent IPOs have also had positive debuts, improving the confidence among investors to take a look at other newcomers. And while some hedge funds are closing their books earlier than usual this year to preserve the strong gains they have made over the past eight months, many fund managers are still seeing an inflow of money that has to be invested somewhere.

And bankers argue that Sands China could be the ticket. The casino operator, which is owned by Las Vegas gaming magnate Sheldon Adelson and holds one of six casino licences in Macau, already controls about 30% of the mass market and is raising money that will go partly towards the re-starting of a development project on the Cotai Strip that was halted last year as the parent company was running out of cash. According to syndicate analysts, the company is also in a prime position to capitalise on any growth in retail spending by Chinese visitors to Macau as it operates about 74% of all grade-A retail space available in the former Portuguese colony.

"Retail spending in Macau has been growing at a compound annual growth rate of 17% since 2004, and Sands China's retail positioning has essentially provided it with a call option on any growth in PRC visitor discretionary spend," analysts at one syndicate bank said, adding that they currently ascribe very little value to the company's retail franchises as Macau's retail market is still at a nascent stage.

However, the retail assets are part of what makes Sands China different from Wynn Macau, which listed in Hong Kong last month. Essentially, Sands China has a much more diversified revenue strategy that, alongside the gambling, also puts a lot of weight on conventions, entertainment and hospitality. One analyst report dubs the company as a pioneer in developing the integrated resorts business model. Its focus on the mass market, which has higher profit margins than the VIP segment, also sets it apart from Wynn, which is primarily targeting high-rollers and VIPs.

The interest in the stock was evident as investors, including a couple of local tycoons, crowded into Sands China's luncheon meeting in Hong Kong yesterday. During the roadshow, the management will also visit Singapore, Europe and the US, including a gaming conference in Las Vegas, where it will get a chance to meet with specialist US investors.

Sands China is offering 1.87 billion shares at a price between HK$10.38 and HK$13.88 apiece. Just over two-thirds of the shares, or 1.27 billion, are new, while the remaining 600 million are secondary shares that will be sold by the parent company. LVS needs capital for its Las Vegas operations, as well as for its ongoing Marina Bay Sands casino and resorts project in Singapore, which is scheduled to open in the first quarter next year.

There is a 10% greenshoe that could increase the total deal size to as much as $3.7 billion. Ten percent of the deal will be earmarked for Hong Kong retail investors initially, but this portion of the deal could increase to 25% if certain clawback levels are triggered. If the retail tranche is between 10 and 40 times covered, the size will increase to 15%, if the subscription ratio is between 40 and 50 times, it will go to 20%, and if the retail orders account for more than 50 times the shares on offer, the size will increase to 25%.

The price range values Sands China at 13.5 to 16.6 times its 2010 enterprise value-to-Ebitda, based on the bookrunner consensus, which puts it at a discount to Wynn Macau's 16.7 times, according to Bloomberg data. Wynn listed in Hong Kong on October 9 after raising $1.63 billion at an EV/Ebitda multiple of 14.5 times. The stock has had a mixed performance since its debut, but yesterday returned above the HK$10.08 IPO price to close at HK$10.30.

Other Macau casino operators have been range trading in recent months amid a mixture of positive and negative sector news, related to, among other things, visitor arrivals and Chinese visa restrictions. Yesterday there was news that Macau has decided to delay the introduction of a 1.25% cap on the commissions casinos pay to the junket operators (essentially the middlemen that look after the high-rollers, provide them with credit and make sure they gamble at a certain casino). A cap is generally viewed as a positive since higher commissions mean lower margins, but according to sector watchers, some casinos have already agreed to a voluntary cap, putting a stop to a fight for VIP gamblers that have driven junket fees higher in recent months and plagued their earnings.

Galaxy Entertainment and SJM Holdings which are currently trading at or near 12-month highs, are valued at EV/Ebitda multiples of 14.4 and 14.9 respectively, while US-listed Melco Crown is lagging at an EV/Ebitda ratio of just 10.7 times.

Aside from the project under development at the Cotai Strip, Sands China owns and operates The Venetian Macao Resort-Hotel, the Plaza, the Sands Macao and the Four Seasons Hotel. The Cotai Strip project, referred to only as sites five and six, is located across the road from the Venetian and will comprise about 6,000 hotel rooms, approximately 1.2 million square foot of retail, entertainment and dining facilities, as well as 300,000 sqf of gaming space, which is large enough to fit 670 tables and 2,200 slot machines.

Despite the large deal size, and contrary to Wynn Macau, Sands China has not enlisted the help of any cornerstone investors—although sources say the deal does include a couple of sizeable anchor orders. The reason for shunning the support of cornerstone investors who will be locked up for a certain amount of time is that the company already has a number of institutional investors on its shareholder list after selling $600 million worth of convertible bonds a few months ago. These bonds will be mandatorily converted into shares at the time of the IPO at a 10% discount to the IPO price and the investors will be locked-up for six months. Consequently, the company wanted to make sure that the shares they sell in the IPO can be freely traded.

At the mid-point of the price range, the shares converted from the CB will account for about 5.3% of the company. Meanwhile, Las Vegas Sands will own about 71% of the company. Before conversion of the CB, the IPO shares account for 23.4% of the share capital.

The retail offering will open next Monday, the final price will be set on November 20 and the trading debut on the Hong Kong main board is scheduled for November 30.

Citi and Goldman Sachs are joint global coordinators and bookrunners together with Barclays Capital, BNP Paribas and UBS.

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