4Q22 performance fell short of expectations
SJM announced 4Q22 results: net income was HK $1.522 billion, down 38% from a year earlier and up 48% from a month earlier; adjusted EBITDA was a loss of HK $951 million (compared with a loss of HK $611 million for 4Q21 and a loss of HK $968 million for 3Q22), which was worse than Bloomberg and we expected a loss of HK $688 million, mainly due to slower-than-expected growth in Shanghai and slower-than-expected business recovery.
Trend of development
The performance will focus on:
1) the company plans to invest HK $13.6 billion in Macau, China, during the next 10-year license period, of which HK $2 billion will be spent on gambling and the rest on non-gambling business; 2) Management expects the company's capital expenditure in 2023 to be HK $1.4 billion, of which HK $900 million will be spent on Shanghai Portugal.
2023 degree of recovery:
1) since the beginning of the year (March 8), the number of boxes in the midfield of the company (except satellite entertainment venues) has returned to 80% in 2019 if the contribution to Lisboa is taken into account, and to 70% in 2019 if the contribution to Lisboa is not included; the betting volume of slot machines, including and excluding contributions to Lisboa, has returned to 100% in 2019. 2) since the beginning of the year (March 8), the overall EBITDA of the group has turned from deficit to profit, but the EBITDA of Shanghai Lisboa is still negative.
Upper Lisboa Resort:
1) in the first few months of 2023, Lisboa achieved slightly more than 1 per cent market share; 2) Management expects that with current operational efficiency, after gaining 2-3 per cent market share, EBITDA can break even. 3) the average daily operating cost of Shanghai Portuguese capital is about HK $5 million, and the company expects that the average daily operating cost will be HK $80 million to HK $9 million after the full volume (the company had previously estimated that the average daily operating cost will be HK $10 million); 4) the deployment of an additional 150 gaming tables within SJM has been approved by the government, and the company expects to deploy 10 million gaming tables when the remaining properties on 2Q23 open (about 1000 new hotel rooms).
Profit forecast and valuation
We lowered net income forecasts for 2023 and 2024 by 4 per cent and 5 per cent to HK $26.305 billion and HK $29.989 billion, and adjusted EBITDA forecasts for 2023 and 2024 by 4 per cent and 6 per cent to HK $3.685 billion and HK $4.722 billion, based on slower-than-expected volume in Shanghai and Portugal and slower-than-expected overall business recovery. The current share price corresponds to 10 times 2H23e+1H24e EV/ adjusted EBITDA. We maintained our neutral rating but lowered our target price by 9 per cent to HK $5.20, corresponding to 12 times 2H23e+1H24e EV/ adjusted EBITDA, which has 33 per cent upside from the current share price.
Risk
The volume of the Upper Lisboa Resort is lower than expected; the recovery is slower than expected; and competition increases or decreases market share.