Performance review
2Q22's performance is better than we expected.
880.HK disclosed 2Q22 results: net income was HK $1.591 billion, down 42% from a year earlier and 37% from a month earlier; adjusted EBITDA was a loss of HK $702 million (HK $191 million for 2Q21 and HK $474 million for 1Q22), better than the market's consensus loss of HK $851 million and our forecast of HK $743 million. We attribute SJM's performance to: 1) volume at the Lisboa Resort; offset 2) the recovery is not as fast as expected due to repeated outbreaks.
Trend of development
Management said on the results conference call: 1) 1H22, the company's gaming revenue market share increased to 16% from 11.6% of 1H21; part of the new opening of the Lisboa Resort has driven the company's non-gaming revenue to double.
2) at present, 10 satellite casinos have signed a new agreement, valid from June 26 to December 31, 2022; the other four satellite casinos will continue to use the existing business model; under the new betting law, the company does not need to acquire all satellite casinos, the company is negotiating with satellite casinos and other issues. 3) the daily operating cost of 1H22 is HK $15.8 million (the daily operating cost of 4Q21 is HK $17.2 million), which dropped to HK $15.3 million in June 2022; the company expects the daily operating cost to be controlled at HK $15 million (the daily operating cost of Lisboa Resort will be reduced from HK $5.1 million to HK $5 million, and the daily operating cost of other properties from HK $1040 to HK $1000). The pre-opening cost of the remaining unopened properties at the Lisboa Resort is estimated to be HK $100 million. 4) employee costs account for about 75% of the company's operating costs. During the suspension period, employee costs can be reduced by encouraging employees to take voluntary unpaid leave. During the suspension period, the proportion of salary payment is less than 50%. The company's daily staff costs were reduced from HK $1000 to HK $12 million to HK $50 to HK $6 million. 5) Cash flow and liquidity: as of June 2022, the company had HK $2 billion in cash on hand and a revolving credit line of HK $3.6 billion. STDM, the parent company of SJM Holdings, plans to provide additional liquidity support (up to HK $5 billion) if necessary to meet the capital requirement of 5 billion patacas during the licence reinvestment process. The company expects that the government may require bidders to complete the submission of 5 billion patacas of capital by the end of October after the completion of tender delivery on September 4, 2022. 6) to acquire the Huilihai Cube Casino, the company issued HK $1.9 billion of convertible bonds in June 2022 and refinanced a HK $19 billion loan, of which HK $15.4 billion was used to repay the HK $13.3 billion loan. 7) the remaining capital expenditure of the Resort is about HK $1.5 billion, which is planned to be completed before 3Q23. 8) Management estimates that it will still be some time before Chinese mainland tourists return to Macau casinos after the local epidemic in the MSAR has been brought under control.
Profit forecast and valuation
We cut our revenue forecasts for 2022 and 2023 by 4 per cent and 7 per cent, lowered our 2022 adjusted EBITDA forecast to a loss of HK $2.455 billion, and maintained our 2023 adjusted EBITDA to HK $4.087 billion. The current share price is equivalent to 9.5 times EV/EBITDA in 2023. We maintain a neutral rating and a target price of HK $4.40, which corresponds to 10 times 2023 EV/EBITDA, which has 38.8% upside from the current share price.
Risk.
COVID-19 recurrent epidemic; regulatory uncertainty; gambling concession expires in 2022.