3Q24 performance was better than the market's unanimous expectations

Aobo Holdings announced 3Q24 results: the company's net revenue reached HK$7.499 billion, up 28% year on year, up 9% month on month, and recovered to 91% of 3Q19 level. The company's adjusted EBITDA was HK$1.037 billion, up 83% year over year, up 19% month on month, and recovered to 109% of the 3Q19 level, better than Bloomberg's agreed expectation of HK$0.994 billion.

We believe that the company's performance is mainly due to: 1) the increase in the market share of gaming revenue driven by the volume of property sales in Shanghai, and 2) the increase in gaming revenue market share driven by the Sky Gaming Zone that opened in May 2024.

Development trends

Highlights of the management performance conference call are as follows:

In October 2024, the company's total gaming revenue increased by more than 20% year on year (the industry's total gaming revenue increased by only 7% year on year), benefiting from the sales volume of properties in Shanghai Lisboa and the performance exceeding expectations of other self-operated casinos.

Currently, Aobo's high-end midfield revenue contribution is about 20%, and the average daily theoretical profit (ADT) corresponding to high-end midfielder rating customers is about HK$0.02 million or more.

Management hopes that by introducing higher levels into customer plans, giving away more hotel rooms (currently only 65% of rooms are given to customers), hosting more entertainment events at the Grand Lisboa Auditorium in 2025, and improving the convenience of transportation, to drive the gaming consumption of high-end mid-tier rated customers.

Management anticipates that marketing rebate costs will rise in the future as the company strives to increase the gaming consumption of high-end midmarket rated customers at its properties.

Upper Lisboa is developing a new high-end gaming area located on the 36th floor. The product is similar to the Sky Phoenix gaming area that Grand Lisboa opened in May 2024.

Profit forecasting and valuation

We have kept the company's adjusted EBITDA forecasts for 2024 and 2025 largely unchanged. The company's current share price corresponds to 9.6 times 2024 and 8.4 times 2025 EV/EBITDA. We maintain a “neutral” rating and target price of HK$3.00. The target price corresponds to 10 times 2024 and 9 times 2025 EV/EBITDA, with 11% upside compared to the current stock price.

risks

Lisboa's volume falls short of expectations; recovery may be slower than expected; competition in the industry intensifies, and market share may be lost.