SJM’s Q4 EBITDA Loss Misses Expectations, but Solid 2023 Recovery Likely to Drive Turnaround

SJM’s 00880 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 continue to like SJM’s turnaround story and see the shares as undervalued as of the March 9 market close. We think the slower ramp-up at GLP along with weaker-than-peers profitability and liquidity concerns are the key negatives that have damped SJM’s share performance. However, with China having now eased coronavirus restrictions, tourism traffic and gaming demand are flowing back to Macao gradually, which will improve SJM’s profitability and cash flows. Our assumption for industry GGR reaching 50% of 2019 levels in 2023 will drive a turnaround of SJM’s adjusted EBITDA. We expect adjusted EBITDA of HKD 1.8 billion in 2023, up from negative HKD 3.1 billion in 2022 and representing 44% of 2019 levels.