Another way to look at the Macau casino investment is simplifying the situation to binomial outcomes. The assumptions used are meant to be overly simplistic and conservative.
Upside % reflects return potential assuming mean reversion to 2019 average prices
Downside % reflects the Net Asset value of the companies. For Sands China it's roughly US$1.6bn or 10% of current MCap, for Wynn Macau it's negative hence 0 value
Pre-news upside % reflects the return potential using their share price before Sep 15, 2021
Combined Port % is the 2:1 purchase ratio we'd chosen for buying Sands and Wynn
For the Combined Portfolio, framing the situation assuming either full loss (both licenses cancelled) or full reversion in stock price:
For it to be a neutral bet (EV=0): the Win Rate % needs to be =/> 37.2%. Put another way, as long as Sands+Wynn don't lose their license more than 62.8% of the time, this is a positive returning investment/bet
If we assume two licenses are cancelled (out of six) and this determined the Win Rate %, the EV return is 74%. The real situation would be far more complex given combinations of license losses, the division of gaming tables and properties among remaining players, etc
These are very low hurdle rates and we're comfortable that the actual Win Rate % is much higher.
Breaking it down further, the required Win Rate probability for the bet to be neutral (EV=0) for both casinos, the combined portfolio on a pre-news and post-news basis:
We can see that the required odds has significantly fallen reflecting the market view that last week's consultation announcement was extremely material. The summary is here:
Using Bayes Theorem to explain the significance, the maths implies that the odds of seeing this type of announcement in a negative vs positive outcome bidding process is:
3.1x as likely based on Sands China's stock reaction
1.9x as likely based on Wynn Macau's stock reaction
Qualitatively and intuitively this doesn't make sense to us - most of these issues were flagged months ago by the gaming industry. We weren't surprised to see the nine review areas and believe the probability of seeing this type of news announcement is fairly similar for both a positive and negative bidding outcome process i.e. the stock market has materially overreacted to the news.
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