Demand for Sands China Ltd’s (SEHK: 1928) casino resorts could soar given these three factors. –
As expected, Sands China Ltd’s (SEHK: 1928) interim results for 2020 were very bad given the coronavirus outbreak.
For the six months ended 30 June, 2020, Sands China’s net sales fell 81% year-on-year and the company reported a loss of US$716 million, down from a profit of US$1.07 billion in the first half of last year.
Due to the Covid-19 pandemic, visitors to Macau fell sharply as travel bans and the desire to socially distance hurt demand.
According to the territory’s government, total visitation from mainland China to Macau fell in the range of 96.3-99.6% from February to June 2020 year-on-year.
Fortunately, how Sands China did in the interim period of 2020 doesn’t matter that much besides how strong the company is financially, because the coronavirus outbreak is very likely temporary.
In terms of its financial strength, Sands China has total liquidity of US$3.63 billion as of 30 June, 2020, consisting of US$1.61 billion in total cash and cash equivalents and US$2.02 billion in borrowing capacity under a 2018 revolving facility.
Given its total liquidity, Sands China has a substantial runway even if it continues to lose money at the same rate as the interim 2020 period.
In terms of how well Sands China will do in the future, what matters substantially is the lifting of travel restrictions, the economic rebound of mainland China, and the progress of any potential coronavirus vaccine.
If these three conditions continue to improve, Sands China could eventually reinstate its dividend.
Even if the stock price doesn’t rise by much due to market anticipation of future events, any dividend reinstatement would certainly be good news.
In terms of the three conditions, there’s reason for optimism. Here’s more on the tailwinds.
1. Lifting of Some Travel Restrictions
In terms of the lifting of travel restrictions, there has been some good news. In July, Guangdong eased some travel restrictions by lifting quarantine requirements from visitors from Macau to the province.
Before the lifting, visitors from Macau to Guangdong province had to quarantine for 14 days. Given the return time costs, casino travel to Macau from Guangdong province had predictably been very low.
Given the Guangdong lifting, Kenneth Fong of Credit Suisse thinks Macau casino activity could recover to 15-25% of their pre-Covid-19 levels in the short term.
With Guangdong easing travel restrictions, other regions of mainland China could also follow in the future, forming a potentially encouraging trend. Guangdong accounts for around 40% of travellers to Macau.
2. Economic rebound in China
In terms of economic activity, there’s also been some good news.
Mainland China’s economy has returned to growth rather quickly and China’s second-quarter GDP beat expectations.
Given the government stimulus and consumer behaviour continuing to normalise, China’s GDP growth could continue.
If mainland China’s economy grows rapidly, demand for Macau casinos could rise once the travel restrictions end.
3. Potential Covid-19 vaccine
In terms of a potential Covid-19 vaccine, there is also reason for optimism.
According to the South China Morning Post, China’s Sinopharm believes it will have a vaccine on the market in December. The company is reportedly planning to price the vaccine around US$145 for the combined two-shot regimen.
Other Chinese companies such as CanSino Biologics also have promising potential vaccine candidates.
Eventually, once enough vaccines are made and distributed, the travel restrictions to Macau will end, and consumer behaviour should begin to normalise.
Business for Macau casinos was very slow in interim 2020. Nevertheless, the trends of the partial easing of travel restrictions, the beginning of economic normalisation in China, and the progress on a potential Covid-19 vaccine are encouraging.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.
The Motley Fool Hong Kong Limited(www.fool.hk) 2020