Company Reports

Narrow-moat SJM's second-quarter performance was largely in line with our and the market's expectations, with market share in gross gaming revenue edging up to 12.6% from 12.4% a quarter ago. Management indicated a further uptick of its GGR market share to 13.5% in July. We believe this encouraging uptick is mainly driven by a robust performance at the firm's Peninsula asset, the flagship Grand Lisboa, while the share of its new Cotai property, the Grand Lisboa Palace rose moderately to 2.5% in July from 2.2% in the second quarter, trailing its midterm target of 5% by 2026. We slightly raise our 2024 revenue forecast by 4% to HKD 28.3 billion to reflect a stronger-than-expected sales growth outlook at GL into the second half, offset by a higher operating expense assumption amid intense competition. Our long-term forecasts remain unchanged, and we maintain our fair value estimate at HKD 4.68 per share.

We maintain our earnings forecasts and fair value estimate of narrow-moat SJM at HKD 4.68 per share, following the firm’s solid first-quarter performance that reflects a gradual catchup of its new property Grand Lisboa Palace, or GLP, in profitability and market share in gross gaming revenue, or GGR. Its new business initiatives in setting up a centralized platform to increase the connectivity between its properties, and expanding the marketing team are bearing fruit, which helped to drive the group’s first-quarter mass segment GGR to 134% of its 2019 level and 162% in May Golden Week holiday, compared with the 115% in the December quarter. We expect these initiatives, along with additional product offerings—including more food and beverage venues, ramp-up of shopping malls, as well as construction of Grand Hall for concerts and other nongaming events, to further improve the firm’s operating efficiency and accelerate sales growth at GLP in the coming quarters.

Following Galaxy’s special interim and final dividend offerings, MGM China and Wynn Macau have followed suit and both declared final dividends on March 21. We view this as a positive surprise, which came in at least one year earlier than our expectations, suggesting that management groups are confident in Macao’s gaming demand recovery. We maintain our assumption that industry gross gaming revenue will rise to 85% of 2019’s level in 2024, up from 63% in 2023. With that, we believe Macao casinos will record meaningful improvements in profitability and cash flows in 2024. We also expect Sands China to resume its dividend program in 2024, while Melco Resorts and SJM will likely be later in 2025 given the still-stretched balance sheet for both companies.

As one of six casino license holders in Macao, SJM Holdings benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. The additional supply by major casino operators in the next few years will increase higher-spending overnight visitors and revitalized appeal for Macao. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

SJM’s fourth-quarter results were in line with our expectations and adjusted EBITDA at its new property Grand Lisboa Palace reached the break-even level for the first time since its launch in July 2021. Nevertheless, the ramp-up of GLP remains slow, with market share in gross gaming revenue staying flat at 1.7% from a quarter ago, trailing its midterm target of 3%-5% by 2025-26. We believe the firm's new initiatives to create a centralized platform to increase connectivity between its properties, build direct VIP contacts, and expand the marketing team, as well as adopt smart radio frequency identification gaming tables, will help improve operating efficiency and accelerate sales growth at GLP. However, all these will take time to bear fruit and near-term visibility of market share gain remains low amid intense competition, in our view.

As one of six casino license holders in Macao, SJM Holdings benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. The additional supply by major casino operators in the next few years will increase higher-spending overnight visitors and revitalized appeal for Macao. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

SJM’s third-quarter results were broadly in line, reflecting continued profit improvement, with revenue and adjusted EBITDA returning to 71% and 60% of 2019 levels respectively, up from 64% and 43% in the prior quarter. Nevertheless, the ramp-up of the new property Grand Lisboa Palace, or GLP, is still lagging market expectations. With some of its Macao peers adding a significant number of hotel rooms and nongaming facilities, we believe competition will likely rise and SJM may need to make a greater effort to boost its revenue share. We maintain our 2023 earnings forecast but lower our 2024-25 adjusted EBITDA by 7%-15% to factor in a 1- to 2-percentage-point cut in adjusted EBITDA margin amid higher reinvestment and promotional expense assumptions. Our long-term earnings forecasts are unchanged, and our fair value estimate of HKD 5.80 is intact. We continue to like SJM’s turnaround story with improving profitability, as visitors continue to return to Macao after an extended period of absence.

As one of six casino license holders in Macao, SJM Holdings benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. The additional supply by major casino operators in the next few years will increase higher-spending overnight visitors and revitalized appeal for Macao. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

Although SJM’s June-quarter adjusted EBITDA of HKD 430 million was slightly behind Bloomberg consensus, we think performance is encouraging, reflecting robust profit improvement, with revenue and adjusted EBITDA returning to 64% and 60% of 2019 levels respectively, up from 46% and 3% in the prior quarter. Management also sees strong momentum into the third quarter, with month-over-month gross revenue rising 10% and adjusted EBITDA up 48% in July. More importantly, the ramp-up of new property GLP is gaining speed, with 2% market share in July, up from less than 1% in the first quarter. The property also delivered positive adjusted EBITDA in July, from a loss in the first quarter. We think a continued ramp-up of both gaming and nongaming facilities, coinciding with improving tourism traffic to Macao, will further accelerate SJM’s sales growth.

As one of six casino license holders in Macao, SJM Holdings benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. The additional supply by major casino operators in the next few years will increase higher-spending overnight visitors and revitalized appeal for Macao. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

SJM Holdings returned to positive adjusted EBITDA for the first time since the start of 2022. We’re also encouraged by management’s comment that the company’s month-to-date performance has been decent, with mass gaming volume reaching 110% of 2019 levels, or 95% on a comparable basis (excluding Grand Lisboa Palace). We think these positive data points are broadly in line with its Macao peers, confirming a solid recovery in Macao gaming demand. However, the ramp-up of new property, GLP, is still lagging, having gained less than 1% market share in the quarter with an adjusted EBITDA loss of HKD 230 million. We think a continued ramp-up of both gaming and nongaming facilities, coinciding with improving tourism traffic to Macao, will accelerate sales growth at GLP quarter over quarter, and lead to a turnaround in adjusted EBITDA in the second half. We maintain our fair value estimate of HKD 5.60 per share, after a minor tweak of our forecast.

SJM’s fourth-quarter adjusted EBITDA loss of HKD 952 million slightly missed our expectations, with a sluggish ramp-up at the newly opened Grand Lisboa Palace the key disappointment. But we’re still encouraged by the company’s decent quarter-to-date performance, with mass gaming volume reaching 70% of 2019 levels on a comparable basis (excluding GLP). Management also indicated that the group as a whole is running at positive adjusted EBITDA, although GLP is still loss-making. We think these positive data points are broadly in line with Macao peers, confirming a solid recovery of Macao gaming demand. In addition, SJM targets adding 100 gaming tables and more than 1,300 hotel rooms through the second quarter. We anticipate this, along with improving market conditions after China eased COVID-19 restrictions, will accelerate the ramp-up of GLP and drive a turnaround at the property in the second half. We maintain our assumption of industry gross gaming revenue returning to 50% of 2019's level in 2023, up from 14.4% in 2022. We keep our fair value estimate unchanged at HKD 5.60 per share after updating the property opening schedule and rolling our model one year forward.

We have lowered our Morningstar Uncertainty Rating to High from Very High for the Macao gaming companies under coverage, as the removal of China’s COVID-19 restrictions from Jan. 8 should have removed the major hurdle that has been hindering Macao’s recovery over the past three years. Although it is likely that Macao and China will experience additional COVID-19 waves, which may cause demand to fluctuate, the evidence from other countries shows that the impact on the recovery trend was shorter and less impactful with each wave. We expect the same in Macao, and we have improved visibility around our existing base-case assumption that industry gross gaming revenue, or GGR, will return to 50% of 2019’s level, or MOP 145 million, in 2023, up from 14.4% in 2022. This is slightly higher than the Macao government’s estimate of MOP 130 million, reflecting a more upbeat outlook on the pent-up demand from both mainland China and Hong Kong.

As one of six casino license holders in Macao, SJM Holdings benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. The additional supply by major casino operators in the next few years will increase higher-spending overnight visitors and revitalized appeal for Macao. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

As expected, the Macao government granted the fresh 10-year gaming concession to the six existing casino operators on a provisional basis. We think the announcement will remove many of the remaining concerns on casino licenses. Although detailed terms of the contracts haven’t been disclosed yet, including the investment pledged by each company and nongaming activities each company planned to develop, we don’t expect material risks toward the finalization of the license grants by the end of December, as Macao’s gaming law amendment has concluded, with major changes in line with majority opinions.

Narrow-moat SJM’s weak third-quarter results, with a widened adjusted EBITDA loss of HKD 968 million from HKD 702 million in the prior quarter, were within our expectations and continued to reflect coronavirus headwinds and related travel restrictions. Although near-term challenges persist, the Chinese authorities were restarting e-visa travel to Macao from Nov. 1, according to a notice from China’s National Immigration Administration on Oct. 31, which we think is a significant step toward durable recovery of Macao gaming demand. We retain our long-term constructive outlook for Macao's gaming sector, but slightly revise down our assumptions of industry gross gaming revenue to 50% of 2019 levels in 2023 from 60% in our earlier forecast. The tweak is to reflect the challenges resulting from: 1) an extended zero-COVID-19 period, which may continue to disrupt tourism; and 2) slow economic growth that will likely weigh on customer spending and patron betting sizes. As such, we lower our fair value estimate for SJM slightly to HKD 5.60 per share from HKD 5.80.

As one of six casino license holders in Macao, SJM Holdings benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. The additional supply by major casino operators in the next few years will increase higher-spending overnight visitors and revitalized appeal for Macao. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

Malaysia Genting Group’s participation in Macao’s gaming concession bidding surprised the market, which brings some uncertainty as to whether the existing players will win renewed licenses, given Genting’s strong presence in global gaming markets and successful track record in diversification of non-gaming business. Nevertheless, we think Genting’s bid is unlikely to threaten the existing players’ competitiveness in the tendering process, as the six have put two-decade efforts in supporting Macao’s economy and employment, which include more than two years’ downturn resulting from COVID-19 restrictions. We think it is unlikely for the Macao government to rule out any of the six, if they could meet the requirements of the new concession tendering process. As such, our base-case scenario is unchanged, which assumes all six existing casino operators would be granted new gaming concessions, and we keep our fair value estimates of Macao casino operators unchanged.

As one of six casino license holders in Macao, SJM Holdings benefits from insatiable Chinese demand for gaming, underpinned by rising per capita disposable income in China. The additional supply by major casino operators in the next few years will increase higher-spending overnight visitors and revitalized appeal for Macao. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

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.