Q3 adjusted EBITDA loss expands in 22
SJM's 22-year Q3 net income was HK $1.03 billion (the same below), year-on-year-57.4% / month-on-month-35.4%; gaming revenue-61.4% / month-on-month-37.7%. Q3 market share decreased by 0.8 percentage points on a quarter-on-quarter, of which midfield market share decreased by 1.9 percentage points on a quarter-on-quarter basis. The adjusted EBITDA of Q3 is-970 million yuan (loss compared with + 37.9%), which is lower than expected, and the loss is the largest in the past 11 quarters. The operating condition is not satisfactory. Shanghai Lisboa, which has been losing money since the opening of Q3 in 21 years, is the main drag on performance. As of the end of September 22, the Group had about 9.4 billion yuan of liquidity, including 1) 4.54 billion yuan in cash and cash equivalents; 2) 2.9 billion yuan in unspent credit line; and 3) 2 billion yuan in unsecured term loans from the controlling shareholder, Macau Travel and Entertainment. It is expected to support about 16.7 months of operation on a zero-income basis.
We estimate that the group's loss on Q4 will be slightly smaller than that of Q3 to about 500 million yuan. when the electronic endorsement and the resumption of tour groups are restarted, we believe that it will attract more tourists to Taipa, where integrated resorts are concentrated, which will virtually boost the popularity of Lisboa. Looking forward to next year, the resumption of electronic endorsements for individual travel may become a major factor in the break-even record in Shanghai-Portugal.
The savings on existing properties are better than expected, but the operating expenses are offset by the costs of satellite casinos. The average daily operating expenses of Shanghai Portuguese capital and existing properties are reduced to 8.9 million yuan and 4.3 million yuan, respectively, compared with-13.3% and-16.1%, which is better than we expected. This is mainly due to a partial reduction in salary costs during the suspension of operations in mid-July.
However, due to the signing of new temporary cooperation agreements with 10 of the 14 third-party satellite casinos, the average daily operating cost of self-operated satellite casinos has increased significantly to 3.5 million yuan, offsetting the above reduction in salary costs. as a result, the total daily operating expenses of Q3 Group was + 7.6% to 15.24 million yuan.
The route of Macao's economic return to normal is beginning to clear.
Following the announcement by the Macao Health Bureau on October 26 of the epidemic prevention guidelines for receiving tour groups visiting Macao, the National Immigration Administration officially announced on October 31 that applications for electronic endorsement for mainland residents to visit Macao would be re-accepted nationwide on November 1. the measures will reduce the inconvenience for mainland residents to visit Macao and facilitate the recovery of medium-and long-term gambling revenue. In 2019, individual visits to the mainland accounted for 46.8 per cent of mainland visitors to Australia, while tour groups accounted for only 23.0 per cent. We estimate that individual visitors contribute about 60 per cent of gambling revenue.
Although under the background of the current nucleic acid testing requirements and the recent repeated epidemics in Zhuhai and Macao, we do not think that gambling revenue will rebound rapidly in the short term, but the resumption of electronic endorsement and the resumption of tour groups to Macao are "normal" exchanges between the mainland and Macao, which is expected to help boost the weak investment climate in the sector, with reference to the gambling revenue data of the governments of Las Vegas and Singapore after the relaxation of epidemic prevention restrictions. We expect a faster recovery in gaming revenue from the second quarter of next year.
Raise the target price to HK $3.18 and maintain the "neutral" rating
In response to the operating conditions of Q3 and the latest epidemic development in Macau, we have reduced the adjusted EBITDA by 12.9% and 33.4% respectively in 22-24 to HK $3.32 billion (if we do not restart the electronic endorsement, the profit reduction will be even greater). As the mainland has restarted tour groups and electronic endorsements to Australia, it has provided a clearer path to industry recovery, reduced the industry's risk premium and helped raise valuations, raising the target price from HK $2.86 to HK $3.18, equivalent to 43.7 times EV/EBITDA in 23 years. However, the future of satellite casinos is still uncertain, so the "neutral" rating is maintained for the time being.
Risk tips: (1) the risk of deterioration of the epidemic; (2) the risk of casino license renewal; (3) the mainland to step up efforts to combat the risk of capital outflow