Despite improvement, shrinking SJM runs low on luck

The former casino powerhouse’s revenue rose 73% in the first quarter, but it continued to lose money as it lagged many of its peers 

Key Takeaways:

• SJM Holdings lost HK$74 million in the first quarter, narrowing sharply from a year earlier, as Macau’s gambling industry recovered post-pandemic
• Investment banks aren’t bullish on the casino operator, with Morgan Stanley maintaining an “underweight” rating on the company

By Lau Chi Hang

Former casino mogul Stanley Ho reigned supreme in Macau’s gambling industry for four decades, cashing in on his monopoly as holder of the city’s lone gambling license. Even today his family’s name is still closely associated with the industry, even if its flagship gaming business, SJM Holdings Ltd. (0880.HK), fell out of favor two decades ago when the city ended his monopoly with the award of new gaming licenses.

The company is unlikely to gain that crown anytime soon as it faces competition from slicker rivals. And its latest quarterly results, released earlier this month, show it’s been slower to recover from the pandemic than bigger names like Sands China (1928.HK) and Galaxy Entertainment (0027.HK).

The company lost HK$74 million ($9.47 million) in the first quarter, though that marked a significant improvement from its HK$869 million loss in the year-ago period when a wave of Covid infections hit China shortly after it ended its pandemic restrictions. SJM’s net revenue rose 73% to HK$6.92 billion for the latest period, while its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose nearly 27 times to HK$864 million.

The company’s core property, the Grand Lisboa Macau, posted HK$1.96 billion in revenue and adjusted EBITDA of HK$535 million, up 2.4 times year-on-year. Its newest resort, the Grand Lisboa Palace Resort Macau, saw its revenue nearly double to HK$1.42 billion, with adjusted EBITDA of HK$88 million, compared with a loss of HK$230 million a year earlier. But its operation of “satellite casinos” operated under contracts by third parties continued to lose money, with an adjusted EBITDA loss HK$52 million. 

Investors weren’t especially betting on the stock after the announcement, with SJM’s shares edging up just 0.35% to HK$2.87 the day after the latest report.

Weak analyst sentiment

The big improvement in performance also failed to move the needle with investment banks that follow the company. Morgan Stanley noted SJM’s latest results were broadly in line with its forecasts and reiterated its “underweight” rating for the stock with a target price of HK$2.15 – indicating it expects the shares to fall. CICC maintained a “neutral” rating, raising its EBITDA forecast by a marginal 1% to HK$4.21 billion for this year and maintaining its 2025 projection for HK$4.82 billion, with a target price of HK$3.30. HSBC raised its EBITDA forecasts for this year and next by 5% to 6%, and raised its target price from HK$2.60 to HK$3, maintaining a “hold” rating.

SJM has remained mired in the red mostly because its Grand Lisboa Palace Resort Macau is a fledgling property that will take time to grow and still lags in revenue behind the older and more established Grand Lisboa Macau megaresort. Performance gains in the first quarter notwithstanding, the company will need to pump more resources into promoting the newer property. 

SJM’s marketing and publicity spending in 2023 reached HK$3.83 billion, up 7.3 times from 2022, dragging down last year’s overall results as the company spent heavily with the return of tourists post-pandemic. The heavy promotional spending is expected to continue to attract more tourists to the Grand Lisboa Palace Resort Macau, its newest resort opened in 2021 during the pandemic. But those efforts will take time to bear fruit, which is common for any major new property in such a competitive market.

Slumping gaming tables 

SJM is also being challenged by big cuts in the total number of gaming tables it’s licensed to operate. In 2022, MGM China(2208.HK) was licensed to operate 750 tables, up nearly 36% from its previous allocation. Sands and Galaxy saw their numbers unchanged, while Wynn Macau’s (1128.HK) allocation dropped 10.7% to 570 and Melco Resorts & Entertainment’s (MLCO.US) fell by 17.8% to 750. But SJM was the biggest loser in percentage terms, with its table count slashed by 29.2% to 1,250.

The reduction may be too fresh to show up in the company’s performance just yet. But as business bounces back post-pandemic and ramps up at the new resort, the factor could constrain the company’s future growth. The big table cuts may also explain the analyst caution. After all, lack of tables will make revenue gains harder to achieve, even if management runs a tight ship.

Macau’s gaming industry has seen systemic changes in the last few years that have shifted the center of gravity from high-rolling VIPs to mass-market, more casual gamblers. That makes the number of gaming tables a company operates far more important to its business success. 

Dwindling satellite casinos 

Revisions to the city’s gaming law are the driving factor lowering the emphasis on high-rollers. In the past, gaming companies contracted operations of their VIP rooms to agents and took a cut of total profits. But now such subcontracting has been scrapped and agents can only charge commissions instead of sharing the profits. That’s been a huge disincentive for agents to participate in the process.

That shift has become an especially big burden for “satellite casinos,” which are typically smaller properties that are owned by a licensed gambling company but contracted out to third-party operators. Seven such satellite casinos have shuttered since the gaming law’s amendment in 2022, with only 11 still operating, one by Galaxy, one by Melco and nine by SJM. 

SJM’s status as the largest operator of such casinos means it has borne the brunt of the fallout from the rule change. SJM had a total of 16 satellite casinos at their peak in 2019, but now that number has nearly halved. 

Despite those setbacks, there’s no doubt that Macau’s gambling industry is rapidly reviving after three years of suffering during the pandemic. The industry raked in 75.9 billion patacas ($9.44 billion) in the first four months of this year, up 54% year-on-year. Revenue for the whole year is expected to exceed $200 billion patacas. 

That means a rising tide is bound to raise all ships, including SJM’s. But the company is facing its own challenges in the form of shrinking table count, closing satellite casinos, and the need for heavy spending to promote a new property that is still finding its place in the market. So, there may be little upside for SJM’s shares, at least in the short-term, which is reflected in the weak analyst ratings and price targets. 

To subscribe to Bamboo Works free weekly newsletter, click here