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Morningstar | SJM’s Fourth-Quarter Results Hurt by Provision and VIP Market Share Loss to New Capacity

We maintain narrow-moat SJM’s fair value estimate at HKD 7.7 per share. Adjusted EBITDA in the fourth quarter was HKD 846 million, up only 1% year over year and down 8% sequentially due to a HKD 109 million provision against a receivable from a gaming promoter at the satellite Casino Eastern. Excluding the provision, adjusted EBITDA would have grown 14% year over year and 4% sequentially. Net revenue in the fourth quarter was up 5% year over year and 2% sequentially. Dividend payout ratio for the year was 58%. In the fourth quarter, SJM’s overall VIP revenue was down 10% year over year (up 3% for the market) and down 7% sequentially (5% for the market), while mass revenue was up 11% year over year (17% for the market) and up 6% sequentially (9% for the market). Lisboa Palace is on track to complete at the end of June this year at a budget of HKD 36 billion, then management will apply for a government permit to open the property. The time required to do the inspection and grant the license is unpredictable, but we estimate it could be five to six months. Management is confident that there will be sufficient facilities such as hotel rooms, casino, and retail space upon opening to attract junket VIP and mass customers. So far, seven smoking rooms on the VIP floor have been approved and more than 10 rooms are still pending approval.

Grand Lisboa’s adjusted EBITDA margin was 13.9% in the quarter, a 200-basis-point sequential increase due to higher contribution from higher margin grind mass and some cost-cutting. Grand Lisboa revenue was down 15% sequentially due to lackluster VIP performance. The VIP revenue was down 24% sequentially as it lost market share to new VIP rooms in the market. Management believes that VIP customers will slowly but surely return after trying new products. Mass revenue was up 5% sequentially, helped by the grind mass segment and better-than-expected visitation to the property. This was helped by management switching some marketing spend away from the premium segment to the grind mass segment.

Adjusted EBITDA from other self-promoted casinos was down 3% sequentially to HKD 240 million, adjusted EBITDA from satellites was down 41% sequentially or up 28% sequentially excluding provisions.