Las Vegas Sands' Hong Kong IPO Flops

In keeping with tradition at the Hong Kong stock exchange, the Nov. 30 debut of Sheldon Adelson's Las Vegas Sands Macao spin-off was toasted with mid-morning Champagne. He had reason to celebrate: Only a year ago, as the Las Vegas billionaire fought off creditors and was forced to suspend construction on new casino properties to preserve cash, people were wondering if Adelson had overplayed his hand in China's gambling haven.

The $2.5 billion initial public offering of Sands China Ltd.comes as a vindication of sorts for Adelson. The festive mood on the trading floor didn't last long, though. Within minutes of the opening bell, Sands China shares dropped 15%. By the end of trading the stock closed 10.2% lower than its offering price of $1.34 per share, even as shares of other casino operators, including Wynn Macau and SJM Holdings, closed higher.

Worse still for Adelson, the first-day decline may be the least of his worries. Ever since winning a Macao license in 2002, the gaming tycoon has trumpeted his vision of transforming a seedy former Portuguese colony into a Las Vegas clone with luxury hotels, wholesome entertainment, and packed convention halls. But his "if you build it they will come" approach has yet to pay off. Nongaming revenues account for just 14% of Sands China's sales, compared with about 50% for Las Vegas Sands back home. There are plenty of empty seats at the company's purpose-built theater for Cirque du Soleil shows, as many gamblers—of whom more than 50% hail from China—prefer to leave the wife and kids at home.

"lots of execution risks" The singing gondoliers at the mammoth retail mall attached to the Venetian in Macao have also done little to inspire shoppers to open their wallets. That makes it more difficult for Sands China to sell off its mall properties, a long-stated goal. In contrast, the Louis Vuitton (LVMH.PA) outlet in Wynn Macau has the highest sales per square foot of any of its outlets in the world, thanks to its downtown location and modest size.

The stock's disappointing debut did not come as a surprise to many who observed that shares of Wynn Macau, the Hong Kong-traded spin-off of Wynn Resorts (WYNN), have also traded below their IPO price recently after raising $1.63 billion on Oct. 9. "I appreciate that Sands has a longer-term growth story in the next five years, but between now and then there are lots of execution risks," says Gabriel Chan, gaming analyst at Credit Suisse. "That's why I think the IPO was overpriced."

Those risks involve possible cost overruns or further delays in the construction of casino and hotel properties adjacent to the 3,000-room Venetian Macau and Four Seasons Hotel, Cotai Strip, a patch of reclaimed land that boasts little but casinos and an airport. The lack of attractions has prevented Cotai from achieving a critical mass of visitors. To do so, Adelson and others must spend billions more building additional properties, knowing a payoff may take several years. "It's a chicken-and-egg situation," says Chan.

China Sands also suffered the fate of being the last of four Macao casino operators to list in Hong Kong, offering investors plenty of ways to get exposure to Macao's dynamic growth prospects. Gaming revenues hit a monthly record of $1.59 billion in October, up 42% from a year earlier and nearly 18% from September. Investors looking to take advantage of that growth can choose from Wynn Macau, Melco International Development (MPEL), Galaxy Entertainment, and SJM Holdings, which is controlled by 88-year-old Stanley Ho, who brought Macao gaming back in the 1960s. SJM, which enjoyed a four-decade-long monopoly before Macao liberalized the gaming sector in 2002, has managed to claw back market share this year from rivals by attracting a bigger share of mass-market Chinese gamblers who don't go to Macao for the frills offered by the likes of Las Vegas Sands. That helped strengthen SJM's position as the leader in gross revenues.

The IPO funds will allow Sands China to resume construction of its new properties in Macao, while proceeds from the parent company's 23.2% stake will give Adelson some breathing room as he rushes to finish the $5.4 billion Marina Bay Sands set to open in Singapore in the first half of next year.

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