Sands China (1928:HK): first day trading not so good

Sands China (ticker: 1928) made its debut on the Hong Kong stock market this morning. The stock opened at HK$9.35, but quickly dropped to HK$8.78 before rallying.  It closed at HK$9.32, down 10.1% from the IPO offering price, on volume of about 340 million shares.

Worries about the fate of Dubai World rocked smaller world markets late last week.  That certainly didn’t help Sands China.  But it seems to me that the poor showing is, as much as anything else, a signal that a long string of IPOs in Hong Kong has finally reached the point of draining the market of so much liquidity that all the buyers’ money is going into IPOs, with nothing left to bid stock prices higher.

This is part of the natural evolution of the IPO cycle.  What typically happens from this point on is that the IPO flow gradually diminishes, as issuers realize they can only get their stock sold at prices much lower than they had envisioned.  They decide to wait for a better time, instead.

As to Sands China itself, it’s important to remember that the IPO proceeds of US$2.5 billion, less the underwriters’ fees, go to the seller of the shares, the parent company LVS.  So the IPO itself shows investor commitment to Macau and stabilizes the finances of the parent, but does not provide money for the completion of the Sands China Cotai expansion.

LVS did announce last Friday that the project–which consists of 6,000 room under three hotel brands–Shangri-la, Traders and Sheraton–is fully financed and is being restarted.  Where does the money come from?  US$500 million from LVS, US$600 million from a previously issued Sands China convertible bond, and US$1.75 billion in project financing–US$300 million more than had been committed when the project was originally launched.

What do I think about Sands China and Wynn Macau?  There is considerable local skepticism that the Las Vegas model of upscale resorts with entertainment, fine dining and gaming is transferable to Macau.  If it indeed is, these two companies will be the ultimate winners in this market.

My guess is that the Las Vegas model can take its act on the road.  I also think, admittedly without overwhelming evidence, that the Macau government wants this to happen and will tilt the playing field a bit in Sands China’s and Wynn Macau’s favor to help the process along.  Maybe a better way to say this is that Macau will ensure that the playing field is level even though the two firms are foreign.

Also, one of the peculiarities of capital-intensive industries is that they go through cycles of shortage and glut of productive capacity–in this case, hotel rooms and casino floor space.  In the upcycle, however, I think the firms with state-of-the-art capacity get most of the new business and those with older plant tend to lose market share and begin to gradually fade away.

Another complication with Sands China is the suggestion in its name that the company will open casinos elsewhere in China, Hainan Island, for example, as the LVS chairman has already expressed a desire to.

I think there’s no rush to buy either stock.  But they’re certainly issues to monitor closely to see how new capacity is received in Macau and how/whether market share shifts toward the Americans.   This is a question of timing and price paid.  I’ve already decided that they’re both companies whose stock I’d like to own at some point.  As with their parents, I think Wynn Macau is the more conservative choice–if one can call any casino “conservative” these days–and Sands China the more aggressive one.

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