SJM time to dip into Macau Undervalued Shares
SJM – time to dip into Macau?
SJM represents gambling in Macau just as SBM represents gambling in Monte Carlo.
Since its peak in 2014, the company's promotions have fallen by 90%.
In fact, they are now back to the level they were at when it was listed in 2008. Both SJM and Macau have come a long way since then.
Will SJM's promotions regain their former glory?
SJM's history in a nutshell
Analyzing the future of SJM Holdings (ISIN HK0880043028, HK:880) inevitably means examining the company's past.
SJM Holdings was founded by the late Stanley Ho, Macau's most famous businessman, who died in 2020 at the age of 98. Ho recounted how the wealthy Hong Kong founder had failed in his investments to get promoted and witnessed the Japanese army invade his native Hong Kong in 1941.
After this, Ho fled to nearby Macau, a small colony that had been occupied by Portugal for almost five centuries. Macau at that time was a remote, sleazy, unsightly inland waterway inhabited by refugees, spies, pirates, and fortune-seekers.
Ho made his fortune in trade (smuggling), first with China and then with Korea, which was under a UN embargo.
Using his family's excellent connections, he persuaded Hong Kong tycoon Henry Fok to finance his project to turn Macau into a gambler's haven. In 1961, Ho obtained one license to operate a casino in Macau. For example, the details of how he obtained such a lucrative monopoly and continued to operate the casino are vague. An early version of the casino was reportedly used to launder money and circumvent financial regulations. Regardless, the operation made Ho one of the richest men in Asia.
The late Stanley Ho in the early 1990s (2013).
Ho fathered at least 16 children from four wives, and domestic relations deteriorated over time. The dispute over inheritance and status exploded into the public eye in the early 2010s when former spouses No. 2 and No. 3 merged with current spouse No. 4 and fought over their children's directorships and ownership of the family holding company.
When all this happened, Huo had been in poor health and incapacitated for quite some time. As the Financial Times reported in his obituary, the domestic tragedy took on tragicomic dimensions as "Ho slithered around in a wheelchair in front of TV cameras and made contradictory statements about his will depending on which spouse's house he was in at which time."
One year before he died in 2020, the clan was organized. Ho's daughter, Pansy Ho, and the original sponsor Henry Foca family, became United and decided to seize the center of the clan. Private company Socied Dade de Turismo E DIVERS DE MACAU SA is a dominant shareholder of SJM Holdings registered in Hong Kong, and SJM Holdings is a subsidiary of Sociedade de Jogos de Macau (SJM). At that time, according to an application submitted to the exchange, the HO family and the main members of the FOC family agreed to draw one thread to promote the company.
On the day the end of the clan struggle was announced, stock prices rose 11 % to 8 Hong Kong dollars.
Currently 2 Hong Kong dollars 50 cents.
This is compared to the 25 Hong Kong dollar in 2014.
Considering the remarkable growth of Macau in the past 20 years, why does SJM's stock price not improve?
A complex jurisdiction with a mixed performance
Macau has been operated under a new gambling system for 20 years. At first glance, Macau's business is very smooth.
In the process of complex political negotiations on the legal status of the territory as a Chinese economic zone in China, the KHO family abandoned the casino monopoly in 2002. Instead, SJM, American gambling entrepreneurs Steve Win, Hong Kong Galaxy Entertainment Group (ISIN HK0027032686, Hong Kong: 27) have been issued new licenses.
Macau prospered in a new mode. Eventually, other casino operating companies entered, and the construction boom temporarily reached a 25 % annual GDP growth rate, and became the world's most economic growth.
I played a small role in the early stage of the boom as a new residential real estate fund director in the mi d-2000s in Macau. Using the AIM London Stock Exchange, the fund raised funds from urban financial institutions and built a residential real estate portfolio worth $ 300 million.
At that time, what remains in my memory is that the statistics that Macau is rapidly overtaking Las Vegas is widely spread. The Gambling facilities in the United States have long been the largest in the world, but have not matched the strength of Chinese gambling. It was in 2006 that Macau was able to surpass Las Vegas with gambling income.
By 2013, Macau's gambling income was four times higher than Las Vegas.
But this statistics tend to be misleading from several factors:
- Space} Income is not based on indicators per capita, and China has five times as much as the United States.
- Gambling tastes in China are very different from that of Las Vegas, which is actually affecting which games support revenue and what savings are useful for operators.
- Las Vegas has a stronger personality as an event space with home entertainment, and more than 50 % of revenue is obtained from hotel rooms, meals, drinks, tickets, etc. On the other hand, Macau is still the center of gambling, and the revenue from other forms is only on e-third. The exact number depends on which source you trust, but there is no doubt that Las Vegas and Macau are different fish.
Such details make it difficult to compare Macau, Las Vegas, and other successful Asian gambling centers.
If you dig into the complexity of the Macau's gambling industry, everyone will encounter complex aspects. This complicates the verification of odds that can occur in any area, and creates an asymmetrical information of information, creating a chance to be more dominant than other investors.
Let's take a look at the main movements of Macau since 2010, from the most important ones:
- The fight against corruption continues in mainland China. Surprisingly, the level of corruption actually affects Macau's gambling level. In 2013, Macau's gambling industry produced $ 45 billion gambling, estimated in 2017 to $ 77 billion. Instead, the profit for 2023 is only $ 22 billion. Macau's gambling category, for example, was not able to recover completely from the crackdown on corruption in China, but also costs the promotion of Macau casino operators. Macau's gambling operators have fallen into a cheerful price for 10 years.
- During the pandemic period, China has been actively restricting travel and public gathering for a long time. Of course, these conclusions gave Macau a big blow.
- The first preferential treatment for casino businesses will expire in 2022. For several years until the expiration, traders were concerned that casino operators could update their license or update based on unprofitable criteria.
And it does not count the cumulative issues in the Chinese stock market. Most people have recently believed that Chinese bazaar cannot be invested (see the hyperlink comments below). Hong Kong shares are trading at a lower level than in 1997, when they returned to Chinese sovereignty. Macau's gambling promotion is unable to get out of a bigger market sluggish.
Where does that leave SJM?
Family problems have become the past, and now that the casino interests have been updated due to agreement between Macau and existing businesses in 2022, can SJM shares be a mult i-generation buying place? After all, gambling is a business that always wins the house, and will gambling companies with rich traditions attract many people?
After reading the material about this theme over the whole day, I came to the conclusion that it might be.
Aside from the general problems facing Chinese stocks, there are some concerns about the overall situation:
- The first concession, which was granted in the early 2000s, was 20 years, while the latest concession renewal period was only 10 years. SJM (and its competitors) has been operating in this method for two years, and is not far away until 2032. The government's signal is that all of these companies can live with debt. In other countries in the world, such extensions are usually performed for 25 years.
- In order to make Macau a Destination like Las Vegas, the Chinese government calls all the concession companies to invest a lot in no n-gambling entertainment. SJM is an example. The company plans to invest 14 billion mops (MOP = Macau Pataka, $ 1. 7 billion) over the next 10 years. Of these, 12 billion mops ($ 1. 5 billion) are used for no n-gaming entertainment. "Investing in no n-gaming companies has no problem, there is a huge market," as Pansy Ho told the media. "But many people are wondering if she made such remarks in Beijing orders.
- During the pandemic, all Macau's casino managers were forced to get additional debt to survive. Since China resumed, SJM has slowed down more liabilities than in the same industry. The company is suffering from excessive personnel and delays in the expansion of the newly built $ 5 billion Grand Risbore Palace Resort.
SJM's Grand Lisboa Palace Resort in Macau (Illustration: Maryeung / Shutterstock.)
Positive point
- Before the pandemic, Macau's casino stocks were traded at an EV/EBITDA magnification of 15 to 25 times. At present, these magnifications have fallen to 7 to 10 times, based on the forecast of 2025. SJM, which has an EV/EBITDA magnification of 7. 5 times, is expected to be traded in the lower limit of this range and achieve a 5 % dividend yield. It can be said that the evil material has already been evaluated.
Source: UBS, January 17, 2024 (Click the image to enlarge.)
- By 2024, the revenue of the popular gambling market should reach 105 % of the 2019 level. VIP-players need to recover for a long time, but also indicates the possibility of improvement, without exceeding the previous indicators of the visitors.
- In January 2024, Fitch Ratings changed SJM's credit prediction from "negative" to "stable".
Is this forecast a plus?
My judgment is: "I don't know, but I want to know!" "
Michael Fricel, an Asian Century blogger friend, states in the Macau report in July 2021: "Casino is a very profitable business. Casino is a very profitable business. be."
The Grand Lisboa Palace Resort made a huge investment, but is likely to grow lon g-term. After all, only a relatively small rate of 2 % of the Chinese population can afford to spend weekends at a hotel in Macau.
Macau and SJM will eventually grow again.
Pearl River Delta research trip
Considering how Chinese actions have fallen, I can't wait to find out if they are value traps or opportunities to buy.
Since China is a complex country, I would like to analyze brands with the help of local experts. At the end of April 2024, I visited Hong Kong, Macau, and the Delta area.
The itinerary is still undecided, but I want to know a product called Macau, meet a local friend from my network, and in some cases a meeting with a local company listed on a stock exchange. 。
I have been passionate about Monaco's SBM for 20 years, so I want to know more about Macau's SJM. Now that China can provide the world's largest bargain shares, Sands China (ISIN KYG7800X1079, HK: 1928), Win Macau (ASIN KYG981491007, HK: 1128), MGM China (ISIN KYG607441022, HK: 2282), etc. It is necessary to thoroughly investigate, including the famous Macau Casino stock.
There is no doubt that there are many other interesting small and large companies in Hong Kong to jump in.
If you live in Hong Kong or Macau and are ready to drink coffee, please give me a letter!
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