Macau-based gaming operator SJM Holdings Ltd on Tuesday reported a 81.4 percent year-on-year drop in net profit for the third quarter of 2015, to HKD285 million (US$36.8 million). The decrease includes an impairment loss “on an available-for-sale investment” of HKD250 million, the firm said in a press release.
Analysts Anthony Wong and Angus Chan from UBS Securities Asia Ltd said in a note that SJM Holdings recognised an impairment loss on its stake in casino services firm Macau Legend Development Ltd, “with HKD250 million being the difference between their purchase price and the stock’s closing price on September 30”.
Macau Legend runs two casinos in Macau under the gaming licence of SJM Holdings.
Without the impairment loss, profit for the period would have decreased by 65 percent from a year earlier, said SJM Holdings.
“The impairment is non-cash in nature, but with dividend payouts historically being tied to reported EPS [earnings per share], it adds some uncertainty to total DPS [dividend per share] for 2015,” said Mr Wong and Mr Chan, adding that HKD250 million is about 8 percent of their current 2015 estimate headline earnings for the company.
Ambrose So Shu Fai, SJM Holdings’ chief executive, said in a statement: “While challenging conditions in Macau’s gaming market continued in the third quarter … SJM is making progress in controlling costs and enhancing customer service.”
On Tuesday, SJM Holdings reported revenue – including gaming, hotel, catering and related services – of approximately HKD11.4 billion for the three months to September 30, down by 37.7 percent from the prior-year period.
Adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) decreased by 49.5 percent year-on-year to HKD884 million in the third quarter, the firm said. Adjusted EBITDA margin for the period decreased to 7.8 percent from 9.6 percent a year earlier.
The UBS team said SJM Holdings’ EBITDA was about 10 percent weaker than consensus estimates.
“Revenues were in line but margins were weaker across all three property segments. At Grand Lisboa, Lisboa and Oceanus, we estimate there has been little reduction in operating costs quarter-on-quarter; while at Lisboa, [SJM Holdings’] management mentioned mass segment reinvestment was meaningfully higher due to cash rebate programmes,” the analysts said.
VIP decline
SJM Holdings’ gaming revenue decreased by 37.9 percent year-on-year to HKD11.2 billion in the third quarter, the firm said in its Tuesday’s statement. It was down 9 percent from the preceding quarter.
VIP gaming revenue in the period was HKD5.4 billion, a decrease of 47.5 percent from a year earlier. VIP rolling chip volume declined 55.6 percent year-on-year to HKD160 billion.
Gaming revenue at flagship property Casino Grand Lisboa (pictured) fell 48.5 percent year-on-year to HKD3.5 billion, whilst its adjusted EBITDA decreased by 49.2 percent to HKD507 million. Revenue in its 15 third party-promoted casinos decreased 34.6 percent year-on-year to HKD6.1 billion, the firm said.
SJM Holdings operated an average of 458 VIP gaming tables in the third quarter, a reduction of 106 tables when compared to the year-earlier period. The firm had 1,263 mass-market tables and 2,737 slot machines in the period.
SJM Holdings’ VIP segment underperformed the Macau market as third quarter VIP revenue market-wide fell by 38.0 percent year-on-year, according to official Macau government data.
“We would attribute this to the company’s greater exposure to the VIP segment than most of its peers as well as the legacy-property-effect,” said analyst Grant Govertsen of Union Gaming Securities Asia Ltd.
Union Gaming said the old Casino Lisboa “is experiencing notably more margin compression than the broader peer group”, with EBITDA margin down to 8.7 percent in the third quarter from 15.8 percent a year earlier.
“We think this problem is likely to be exacerbated for the legacy properties as more Cotai properties open,” said Mr Govertsen, referring latterly to the strip of new casino resorts on a land reclamation area some distance from Macau’s traditional casino zone on Macau peninsula. Mr Govertsen added that “legacy property” excludes the current flagship properties of casino operators on the peninsula.
On a conference call with analysts, SJM Holdings confirmed that Lisboa Palace, its new casino resort in the Cotai district, is on track for a late 2017 opening. The scheme, which broke ground in February last year, has an estimated cost of approximately HKD30 billion. The casino operator has so far spent HKD1.8 billion on the project, according to UBS.
“Our strong balance sheet positions us well for the completion of the Lisboa Palace project which remains on schedule and on budget, and we remain optimistic about the future,” SJM Holdings’ Mr So said.
The firm’s management said 2016 capital expenditure related to Lisboa Palace will be HKD17 billion, and it is “in discussion to obtain bank financing,” said a Tuesday note from Sanford C. Bernstein Ltd in Hong Kong.
