As SJM’s Rights Issue Cools Investor Confidence, Liquidity Risk A Near-Term Focus

SJM’s announcement that it plans to raise almost HKD 3 billion through a rights issue in order to fulfil the capital requirement for upcoming tender process of new gaming concession was surprising and disappointing. Just a few days ago, management stated that it has secured up to HKD 5 billion shareholder loan to boost its liquidity. However, it now appears that the HKD 5 billion capital raise will comprise both debt and equity, made up of HKD 2 billion shareholder loan and HKD 3 billion rights issue. We think parent STDM may want to reserve some capital amid a lack of visibility into Macao’s recovery. We cut our fair value estimate of HKD 5.80 per share from HKD 7.00, to reflect the rights issue dilution impact and near-term challenges to SJM’s recovery outlook. Although the shares are undervalued relative to its long-term growth outlook, we think the rights issue decision and a sharp 34% discount of rights issue price of HKD 2.08 to its closing price of HKD 3.14 per share on August 3, have significantly dampened investor confidence. We believe SJM will likely underperform its Macao peers in the near term before a meaningful recovery of Macao’s gross gaming revenue, or GGR.