As Macao's Gambling Industry Rebounds, SJM Bucks The Trend

The gaming company is shedding most of its satellite casinos and focusing on core assets in a restructuring that has taken a chunk out of quarterly earnings  

Key Takeaways:

• Bucking a positive trend in the sector, SJM posted lower gaming revenues and profits as it reshapes its business to comply with new Macao regulations
• Gaming revenue and adjusted property EBITDA also fell at its flagship Grand Lisboa venue

Macao's gambling industry has regained its luster, but one casino operator is shining less brightly than the rest.

SJM Holdings Ltd. (0880.HK), a veteran of the Macao casino scene, is in the throes of a sweeping restructuring that has wiped the sheen off its earnings results.

In October, Macao's overall gaming revenue surged nearly 16% from the same month a year earlier to a post-pandemic record of 24.09 billion patacas ($3.01 billion). Robust tourist flows, high hotel occupancy and bustling casino floors were all signs that the gambling capital had roared back to life.

But for SJM it was a different story. The company posted relatively gloomy earnings for the third quarter. Gaming revenue fell 4.7% to HK$7.14 billion ($919 million) from a year earlier and 1.8% from the prior quarter. Adjusted EBITDA declined 15% year on year to HK$881 million, although it rose 28% compared with the second quarter. SJM was the only one of Macao's six concessionary operators to report a fall in takings from the gaming business.

The SJM bottom line was even more alarming. Net profit plunged 91% to a mere HK$9 million from the HK$101 million profit recorded a year earlier. For the first nine months, the company made a loss of HK$173 million. By contrast, the other five operators all enjoyed rising profits in the third quarter.

The root cause of SJM's pain is a restructuring of its casino network prompted by Macao's revised gaming rules. A law that fully takes effect at the end of this year requires operators to take any satellite casinos under direct management or otherwise break off existing profit-sharing arrangements with third parties.

SJM has been hard hit in the current earnings cycle, with a network of satellite casinos dotting the Macao peninsula that will cease operations by year-end. Four satellite venues have already closed this year, with three more set to be shuttered by December, stripping SJM of vital market access points. Only two will be bought out and pass into SJM's direct control.

The company's revenue from satellite casinos dropped 14.6% in the third quarter, although EBITDA jumped more than 50% to HK$53 million from HK$35 million in the same period a year earlier. SJM is softening the blow by reducing subsidies and intermediary costs, but the loss of floor space and custom has taken a toll.  SJM's market share for gaming revenue fell to 11.8% in the quarter from 13.9% in the year-earlier period and 12.9% in the previous three months, which the company blamed on the restructuring upheaval.

Chairman Daisy Ho Chiu Fung said the transition was disruptive, but stressed the company was actively reallocating its personnel and gaming resources to strengthen its core business.

Grand Lisboa under pressure

Short-term pain from the forced changes may be unavoidable, but the flagship Grand Lisboa property is also a cause for concern.

A Macao landmark, Grand Lisboa has long been SJM's most reliable profit engine, yet its third-quarter performance notably faltered. The venue's gaming revenue dipped to HK$1.91 billion from HK$1.94 billion in the third quarter of last year, while adjusted property EBITDA slid 13.6% to HK$471 million. 

The company's newer luxury resort, Grand Lisboa Palace, posted an 11% rise in gaming revenue but its adjusted property EBITDA plunged 32.7% to HK$111 million, and hotel occupancy dropped to 94.9% from 98.9% in the third quarter of last year.

Furthermore, SJM held only HK$3.4 billion in cash against HK$27.3 billion in debt at the end of September, making it the most financially leveraged of Macao's six casino operators. The debt load leaves the company with limited means, compared with its rivals, to rebuild its business through marketing campaigns and upgrades of its entertainment offerings. Crucially, only Grand Lisboa Palace has the required scale for a modern resort, while the other peninsula-based properties lack the space for expansion.

SJM shares tumbled 8.05% to HK$2.74 on the first trading day after the results. Its year-to-date gain of just 1.86% lags way behind the sector average of 31.3%. Morgan Stanley warned that SJM's debt could rise further after the company acquires the two satellite properties, assigning an "underweight" rating and a target price of HK$2.80.

The casino operator has outlined a strategy to restore its fortunes, with a focus on revitalizing its core properties on the Macao peninsula. It will redeploy gaming tables and machines from its satellite casinos to another SJM flagship venue, Hotel Lisboa, using extra space that was acquired from its parent Sociedade de Turismo e Diversões de Macau.

However, competitors are rapidly diversifying their businesses beyond gaming. Melco Resorts & Entertainment (NASDAQ:MLCO) has scored a first by opening a private hospital within a resort, while Wynn Macau(1128.HK) (NASDAQ:WYNN) plans a large-scale event center. Having to give up its network of satellite casinos, SJM is already several steps behind. Investor patience may be wearing thin in the face of a lackluster earnings performance and excessive leverage.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.