Q2 performance is in line with expectations, but the mainland epidemic repeatedly hit the recovery momentum SJM Holdings'21-year-on-year net income of Q2 was HK $2.75 billion (the same below), year-on-year + 206.5% / month-on-month + 10.7%; gaming revenue + 7.6%; VIP lounge and midfield gaming revenue were-23.6% and + 13.8% respectively, which outperformed the industry average, resulting in a 0.3% and 1% decrease in Q2 VIP hall and midfield market share respectively. The main reason is that more high-end midfield and ordinary midfield guests go to the Cotai casino during the Q2 holiday to divert guests from the Macao Peninsula, but the company continues to deploy more VIP casinos to the midfield to improve the operational efficiency of the gaming tables. The adjusted LBITDA of Q2 is-191 million yuan, a decrease of 40.3% compared with the previous month, which is in line with our expectations. Average daily operating expenses fell 3.4 per cent month-on-month to HK $11.2 million, about 25 per cent lower than in normal times.
The first phase of Lisboa Shanghai opened on July 30, bringing a new milestone for the presence of Cotai, and the remaining facilities will be launched in the future according to market demand. Based on the size and positioning of Lispas Shanghai, in the normal business environment after the outbreak, we expect to contribute about 3.9 billion of EBITDA, equivalent to 10 per cent of ROIC, in 2025. However, the epidemic in the mainland and Macao has worsened in recent months, which is bound to hit Q3's gaming revenue this year.
In the short term, the epidemic situation, vaccination rate and customs clearance are still the most important factors affecting performance. In the medium to long term, SJM is full of clear catalysts, including: 1) the opening of SJM will help increase market share; 2) the recovery of the core midfield relay is good for SJM's peninsula project; and 3) the uncertainty of license renewal is low.
Upper Lisboa has opened, but the climb is expected to be slower than the previous new casino, which currently has 500 rooms on Hotel Lisboa and seven specialty restaurants, with an initial daily operating expenditure of HK $4.8 million, when the project is fully upgraded to the best operating level. the average daily operating expenditure rose to around 9 million. The existing 3800 employees, including 1400 from other property deployments and 2400 new recruits, are considered by the management to be able to deploy 400,600 staff from existing properties in the future to reduce operating costs. Gaming revenues are expected to return to about 30 per cent in 2019, with the group recording a break-even EBITDA.
Due to the repeated impact of the epidemic, we believe that the climbing progress of Lisboa will be slower than the new casinos in the past, but as the project is located in the high-end market, when the epidemic in the mainland is controlled in the future, we can still benefit from the first recovery of the high-end midfield. The adjacent Lisboa Hotel, which has already opened, can also bring synergy and further boost the flow of visitors to Lisboa.
Lower the target price to HK $8.08 and maintain the "buy" rating
Due to the current tightening of immigration control measures as a result of the spread of the epidemic in the mainland and the occurrence of local cases in Macao, it is expected that the relaxation of immigration restrictions will also be delayed in the next stage. It is believed that the chances of relaxing electronic endorsement and customs clearance between Hong Kong and Macao in the mainland this year are relatively low. We downgraded SJM's 21-23 adjusted EBIDTA forecast of 221.6%, 44.4%, 13.7% to-960 million / 3.2 billion / 6.23 billion, respectively, and lowered the target price from HK $11.50 to HK $8.08, equivalent to 18.0 times EV/EBITDA in 2022, maintaining the "buy" rating.
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 crack down on the risk of capital outflow.