Sands China's weak debut in Hong Kong on Monday signals fading investor appetite for a casino company with a high valuation and an uncertain outlook, and cooling interest in what has been a red-hot sector.
The first-day drop of 10 percent -- the fourth-worst Hong Kong debut this year -- was in line with what analysts had predicted and was blamed on a high IPO price and a weak performance by rival Wynn Macau, which has fallen more than 5 percent since its $1.87 billion Macau unit listing in October.
Sands China's $2.5 billion IPO also came amid global market skittishness in the wake of last week's sell-off over a debt crisis in Dubai, with investors leery of risky bets.
The fever for casino stocks is seen to be over now, said Patrick Yiu, a director at CASH Asset Management. Investors are worrying about the industry outlook, especially keen competition, when more casinos are ready for business.
Sands China, the Macau unit of Las Vegas Sands, the world's most valuable casino firm, offers investors a company that is heavily debt ridden, but which boasts a strong growth outlook in Macau, the world's biggest and fastest-growing gambling market.
Sands opened at HK$9.35, down 10 percent from its IPO price of HK$10.38. The stock closed at HK$9.31.
We're not in this for a day's trading, we're in it for the long term, Las Vegas Sands' CEO Sheldon Adelson told Reuters.
Fund managers said Sands China's share performance was an indication that investors would look more critically at IPOs on offer, such as China Pacific Insurance's $3.4 billion offering and a planned $2 billion IPO by Russia's UC Rusal.
Market sentiment is weak concerning the Dubai debt situation, which will affect investor interest in upcoming IPOs, as they prefer to hold cash now, said Y.K Chan, strategist at Phillip Capital Management Ltd.
Sands' offering is the latest in a string of share sales across Asia from companies looking to take advantage of a broad stock market rally that is now showing signs of fatigue.
On a 2010 enterprise value to earnings before interest, tax, depreciation and amortisation ratio (EV/EBITDA), Sands China traded at 13.5-15 times, compared with Wynn Macau's about 14 times, according to analysts.
By comparison, Melco Crown Entertainment and Galaxy Entertainment Group traded at 11.5 times and 12.1 times, respectively, according to a UBS research report.
It (Sands China's performance) has something to do with the IPO price -- it was set at a very high multiple ... and the company is not making a lot of profit this year, said Belle Liang, head of research at Core Pacific-Yamaichi International (HK) Ltd.
The other gaming stocks have more attractive valuations.
Wynn also disappointed investors, so they are more cautious, she said. I believe the sector has long-term growth potential, but the risks attached to it are very high.
The IPO would be used to pay down debt, shareholders' loans and fund its other casino projects in Macau, Sands said.
Sands, founded by 76 year-old billionaire Adelson, was the first U.S. casino operator to cash in on the Chinese passion for punting when it entered Macau in 2004 after the government opened the gambling market to outsiders.
Sands China, which will remain 70 percent-owned by its parent company, owns two casino resorts and a hotel in Macau. It has a market share of about 22 percent, the second-largest among Macau casino operators, behind SJM Holdings, according to CLSA. SJM shares closed up 4.7 percent.
The Venetian Macau, where gondoliers serenade tourists as they float down a canal under a make-believe sky, is the world's biggest casino and the cornerstone of Adelson's effort to bring Las Vegas-style gaming to the former Portuguese enclave.
Sands relies mostly on mass-market gamblers. This brings high margins because junkets, which bankroll VIP gamblers, cut out a huge chunk of a casino's profits in commissions.
WILL GROWTH CONTINUE?
After financing problems last year forced the highly leveraged firm to halt projects on Macau's Cotai strip, Sands said last Friday it secured project financing commitments of $1.75 billion to complete the first two construction phases of a resort on the strip. It plans to build five interconnected integrated resorts on the location.
Macau, the only part of China where casino gambling is legal, generated record gambling revenue in October, even after China curbed travel to the enclave through visa restrictions on travellers from nearby Guangdong province. But retail investors, who make up a tenth of the subscriber base, are sceptical about whether that growth can continue.
We really doubt people will gamble more in a weak economy, said Alfred Chan, chief dealer at Cheer Pearl Investment.
(Additional reporting by Donny Kwok and Kennix Chim; Editing by Valerie Lee and Ian Geoghegan)