Adjusted EBITDA loss widened in Q22 and the full year
Aibo Holdings' performance in Q4 '22 continued to be disappointing, with net revenue of HK$1.52 billion (same below), or -37.7% YoY +48.1%; gaming revenue -40.2% yo/ +50.8% YoY. Since the resumption of personnel exchanges between Macau and the mainland, both visitors and gaming revenue have been transferred to Cotai, causing the Australian Expo market share in Q4 to decrease by 3.5 percentage points on a quarterly basis. Among them, the share of the mid-market market fell 5.3 percentage points on a quarterly basis, making it the blogging company that lost its market share the most. The adjusted EBITDA for Q4 was -952 million yuan, and the adjusted EBITDA under the normalized win rate was -918 million yuan. Even after deducting the impairment of about 100 million yuan, the overall performance fell significantly short of our expectations. Looking at the whole year, the Group's net revenue was 6.68 billion yuan, or -33.7% year on year; adjusted EBITDA was -3.09 billion yuan, and losses increased 95.8% year on year.
Since the pandemic, the Group has not recorded positive EBITDA in a single quarter, and the operating conditions are not ideal. Shanghai Lisboa, which has been losing money since its opening in Q3 '21, was the main factor that dragged down performance. Shanghai Lisboa recorded an EBITDA loss of 970 million yuan in the full year of '22, accounting for about 31.3% of the Group's total loss. As of the end of December '22, the Group had about 8 billion yuan in cash and cash equivalents. Only 3% of the debt needed to be repaid within 2 years, while most bank loans and notes did not expire after 2026, so the Group's short-term liquidity risk was not great.
Highlights of the performance call
Management stated during the performance conference call that: 1) the Group has received positive adjusted EBITDA figures since the beginning of the year (March 8), but we believe that the recovery of EBITDA is still worse than that of other peers. The main thing is that Shanghai Lisboa has not recorded a break-even balance. 2) Taking into account the contribution of Shanghai Lisboa, midfield betting volume from the beginning of the year to now (March 8) has recovered to around 80% of the same period in '19, and slot betting has fully recovered to the same level as the same period in '19; 3) Currently, Shanghai Lisboa's daily operating expenditure is $5 million. The market share of gaming revenue is only about 1%. It is expected that the market share will increase to 2-3% (about 10 million yuan in gaming revenue per day) before EBITDA's break-even balance can be recorded; 4) It is expected that when all of Lisboa's facilities are launched on the market (currently only launched, and once fully released, the average daily operating expenses will rise to 8-9 million yuan; 5) According to the latest gambling approval contract, the Group will invest a total of 14 billion yuan over the next ten years, of which 12 billion yuan will be non-gaming projects, with capital expenses and operating expenses each accounting for 50% (about 6 billion yuan). Management expects capital expenditure of around $1.4 billion this year.
It is expected that the performance of the Australian Expo will continue to outperform peers
The number of visitors to Macao reached 1,593 million in February, a year-on-year increase of more than 1.4 times. The average number of visitors per day reached 57,000, the highest level since the 2020 pandemic. The Macau Tourism Board revealed that the number of visitors reached 80,000 on the weekend in February, which is equivalent to recovering close to 80% of what it was before the pandemic. Currently, Macao's traffic between mainland China and Hong Kong has gradually resumed. Coupled with the fact that the Macau Tourism Board provides various accommodation, dining and purchase discounts to mainland visitors, it is expected that it will benefit gaming revenue and the continued recovery of visitors to Macao.
However, we believe that Aibo's performance in the industry's recovery stage will still outperform other peers. The main thing is that the industry structure sinks from VIP to midfield, and the proportion of travelers who mainly focus on leisure and shopping and are complemented by gaming will rise, which will benefit integrated resorts located in Cotai, but it will weaken the competitiveness of Macau's properties on the Peninsula. Furthermore, in the past, the group lacked experience in managing large-scale integrated resorts. The geographical location of Shanghai Lisboa is relatively remote, or it has not been able to benefit from the agglomeration effect of being close to other peers. Shanghai Lisboa needs to provide more discounts to attract tourists, so it is expected that the project will take a long time to climb.
The target price was raised to HK$3.92 to maintain the “neutral” rating
Although the company has outperformed its peers in the industry's recovery phase, the Mainland's process of optimizing epidemic prevention has been greatly accelerated in November of last year, and the year-to-date has recorded a positive recovery in Australian visitors and gaming revenue. We raised the Group's net revenue for 23 and 24 by 9.0% and 6.1% to 17.81 billion HK$17.81 billion/HK$23.96 billion; the adjusted EBITDA for 23 and 24 was raised by 59.7% and 3.0% to 1.51 billion/HK$3.42 billion, introducing financial forecasts for 25 years. We used adjusted EBITDA for 24 years (expected to return to normal operating conditions), discounted equity costs of 7.64% to the end of 23, and raised the target price from HK$3.18 to HK$3.92, equivalent to 30.2 and 12.0 times EV/EBITDA in 23 and 24, maintaining a “neutral” rating.
Risk warning: (1) the visa policy is being tightened again; (2) the mainland tightens cross-border capital controls; (3) market share is being lost due to increased competition