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Sands China: Can the Macau Gaming Giant Raise Its Dividend?

Sands China Ltd (SEHK: 1928) is a leading developer, owner and operator of integrated resorts and casinos in Macau. The group also owns five hotel properties and Cotai Expo, one of the largest convention and exhibition halls in Asia.

Not only does it have a large presence in gambling but Sands China’s retail malls also feature more than 850 shops with mid-market and luxury brands. It’s one of several casino stocks listed on the Hong Kong Stock Exchange and has the backing of Sheldon Adelson-owned Las Vegas Sands Corp (NYSE: LVS), of which it is a subsidiary.

With more and more Chinese getting richer as the country industrialises, the growing middle to high-income strata also results in better business prospects for all casinos.

However, in 2015, the Chinese Government under Xi Jinping clamped down on luxury spending in a widespread anti-corruption drive. Casino profits took a massive hit. The Chinese reined in their spending for fear of being targeted by officials bent on cracking down on corruption and bribery, and the recovery has been slow since then.

Investors in Sands China may thus wonder – does the group have any room to raise its dividend, which has remained stagnant at HK$1.99 for the past five years? I will be looking at a few aspects of the group to try to answer this.

Revenue and profit trend

As can be seen above, Sands China’s revenue was impacted badly by the anti-corruption drive in 2016, dropping from US$9.5 billion to US$6.7 billion. Operating profit margin also plunged from 27.6% to just 22.7%, while net profit margin declined from 26.8% to 21.8%.

Note that margins seem to have bottomed out in FY 2016 and have been steadily climbing for the last two years, so this is an encouraging sign for the business, though operating and net margins have still not managed to reach the levels seen before the crackdown.

The good news is that for H1 2019, operating profit margins had recovered to 26.6%, while net profit margin stood at 23.9%. It appears that Sands China is posting a strong and steady recovery from the 2015 decline and it’s only a matter of time before margins can equal or even surpass 2014’s high.

Free cash flows

Sands China has managed to churn out consistent free cash flows (FCF) throughout the last five years. Even during 2015, when revenue and profits were down significantly due to the anti-corruption drive, the group managed to generate FCF of US$844 million.

Since 2015, FCF levels have been steadily increasing on a year-on-year basis, with 2018’s FCF level even surpassing the level back in 2014.

Capital expenditure plans

Finally, I had a look at Sands China’s capital expenditure plans. The group has spent around US$225 million in the first six months of 2019, mainly to renovate, upgrade and maintain existing properties.

The total cost of the development projects on several properties is expected to amount to US$2.2 billion over the next two years and will be funded by the remaining balance from the proceeds of the Senior Notes, the group’s credit facility and operating cash flow.

Room for dividend increase?

My conclusion is that the group certainly has room for a dividend increase. This view is supported by the increase in revenue and net profits over the last four years, a bump up in operating and net margins, as well as very healthy FCF.

Capital expenditures can be comfortably funded by borrowings, so the group should have ample opportunities to raise the dividend for investors. That’s good news for shareholders and income investors looking at the Macau gaming sector.

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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 Royston Yang doesn’t own shares in any companies mentioned.